As filed with the Securities and Exchange Commission on June 10, 2011.March 17, 2014.

Registration No. 333-                    

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

MaconEntegra Financial Corp.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

North Carolina 

6036

 56-0306860

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

220 One Center Court

Franklin, North Carolina 28734

(828) 524-7000

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

 

Mr. Roger D. Plemens

President and Chief Executive Officer

220 One Center Court

Franklin, North Carolina 28734

(828) 524-7000

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

Copies to:

Robert A. Singer,Iain MacSween, Esq.

Joel E. Rappoport, Esq.
Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P.

Kilpatrick Townsend & Stockton LLP
230 N. Elm Street, Suite 2000

607 14th Street, NW, Suite 900
Greensboro, North Carolina 27401

(336) 373-8850

 

Joel E. Rappoport, Esq.

Kilpatrick, Townsend & Stockton, LLP

607 14thStreet, NW, Suite 900

Washington, DC 20005

(336) 373-8850 (202) 508-5800

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:  ¨x

If this Form is filed to register additional shares for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ¨

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer ¨  Accelerated filer ¨
Non-accelerated filer ¨  (Do not check if a smaller reporting company)  Smaller reporting company x

 

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of

Securities to be Registered

Amount

to be

Registered

Proposed

Maximum

Offering Price

per Share

Proposed

Maximum Aggregate

Offering Price

Amount of
Registration Fee

Common Stock, no par value per share

6,612,500 shares$10.00$66,125,000 (1)$7,678

 

Title of Each Class of

Securities to be Registered

 Amount
to be
Registered
 Proposed
Maximum
Offering Price
per Share
 Proposed
Maximum
Aggregate
Offering Price
 Amount of
Registration Fee

Common Stock, no par value per share

 5,686,750 shares $10.00 $56,867,500(1) $7,325

 

 

(1)Estimated solely for the purpose of calculating the registration fee.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


PROSPECTUS

[LOGO]

MACONENTEGRA FINANCIAL CORP.

(Proposed Holding Company for Macon Bank, Inc.)

Up to 5,750,0004,945,000 Shares of Common Stock

Macon

Entegra Financial Corp., a North Carolina corporation, is offering shares of common stock for sale in connection with the conversion of Macon Bancorp from the mutual to the stock form of organization, and the merger of Macon Bancorp with and into MaconEntegra Financial Corp. Entegra Financial Corp. is an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012. We expect that our common stock will be listed for trading on the NASDAQ Global Market under the symbol “ENFC” upon conclusion of the offering. There is currently no public market for our common stock.

We are offering up to 5,750,0004,945,000 shares of common stock for sale. We may sell up to 6,612,5005,686,750 shares of common stock to reflect regulatory considerations, changes in market and financial conditions, and/or demand for the common stock that would increase ourpro formamarket value in excess of $57.5$49.5 million (5,750,000(4,945,000 shares multiplied by the $10.00 purchase price per share) without resoliciting subscribers. We must sell a minimum of 4,250,0003,655,000 shares in order to complete the offering.

We are offering the shares in a “subscription offering” to eligible depositors and borrowers of Macon Bank, Inc., the banking subsidiary of Macon Bancorp. Shares not purchased in the subscription offering may be offered for sale to the general public in a “community offering.” We also may offer for sale shares not purchased in the subscription offering or community offering through a “syndicated offering” managed by Raymond JamesSandler O’Neill & Associates, Inc.Partners, L.P.

All shares are being offered for sale at a price of $10.00 per share. You will not pay any commission for your purchases. The minimum number of shares you may order is 25 shares. Unless increased, the maximum number of shares that may be ordered by any person in the subscription offering, the community offering or the syndicated offering is 75,00030,000 shares, and, no person, together with any associate or group of persons acting in concert, may purchase more than 125,00050,000 shares in the offering. The offering is expected to expire at 4:00 p.m., Eastern Daylight Time, on [].                    ]. Upon notice to you on or before, we may extend this expiration date to no later than. Once submitted, orders are irrevocable unless the offering is terminated or is extended beyond [extension date], or the number of shares to be sold is increased to more than 6,612,5005,686,750 shares or decreased to fewer than 4,250,0003,655,000 shares. If the offering is extended beyond [],            ], or the number of shares to be sold is increased to more than 6,612,5005,686,750 shares or decreased to fewer than 4,250,0003,655,000 shares, we will resolicit subscribers, giving them an opportunity to change or cancel their orders. Funds received during the offering will be held in a segregated account at Macon Bank and will earn interest calculated at Macon Bank’s tier 1 statement savings rate, which is currently% 0.05% per annum.

Raymond JamesSandler O’Neill & Associates, Inc.Partners, L.P. will assist us in selling our shares of common stock on a best efforts basis. Raymond JamesSandler O’Neill & Associates, Inc.Partners, L.P. is not required to purchase any shares that are being offered for sale. Purchasers will not pay a commission to purchase shares in the offering. Raymond JamesSandler O’Neill & Associates, Inc.Partners, L.P. has advised us that following the offering it intends to make a market in the common stock, but is under no obligation to do so.

This investment involves a degree of risk, including the possible loss of your investment. Please read Risk Factors“Risk Factors” beginning on page     13..

OFFERING SUMMARY

Price: $10.00 per Share

 

  Minimum   Midpoint   Maximum   Adjusted
Maximum
   Minimum   Midpoint   Maximum   Adjusted
Maximum
 

Number of shares

   4,250,000     5,000,000     5,750,000     6,612,500     3,655,000     4,300,000     4,945,000     5,686,750  

Gross offering proceeds

  $42,500,000    $50,000,000    $57,500,000    $66,125,000    $36,550,000    $43,000,000    $49,450,000    $56,867,500  

Estimated offering expenses (excluding selling agent fees and expenses)

   1,721,250     2,002,500     2,283,750     2,607,188     1,010,000     1,010,000     1,010,000     1,010,000  

Estimated selling agent fees and expenses (1)(2)

   949,325     949,325     949,325     949,325     462,906     539,500     616,094     704,177  

Estimated net proceeds

  $39,829,425    $47,048,175    $54,266,925    $62,568,487    $35,077,094    $41,450,500    $47,823,906    $55,153,233  

Estimated net proceeds per share

  $9.37    $9.41    $9.44    $9.46    $9.60    $9.64    $9.67    $9.70  

 

(1)Includes: (i)Assumes all shares are sold in the subscription and community offerings and excludes reimbursable expenses and selling commissions payable by us to Raymond James & Associates, Inc. in connection with the offering equal to (a) 6.0% of the aggregate amount of common stock sold to investors other than eligible depositors and borrowers of Macon Bank, assumed to equal 50% of the total offering, plus (b) 1.5% of the aggregate amount of common stock sold to eligible depositors and borrowers of Macon Bank, assumed to equal 50% of the total offering; provided that no commission will be charged for shares sold to our officers, directors or employees, or the officers, directors or employees of Macon Bank (together, “affiliates”), or approximately $2.5 million, at the adjusted maximum of the offering range; and (ii) other costs and expenses of the offering payable to Raymond James & Associates, Inc. as managing agent estimated to be $150,000.fees. For information regarding compensation to be received by Raymond JamesSandler O’Neill & Associates, Inc. and the other broker-dealers that may participate in the syndicated offering, including the assumptions regarding the number of shares that may be sold in the subscription and community offerings, and the syndicated offering to determine the estimated offering expenses,Partners, L.P., see “Pro Forma Data” on pageand “The Conversion – Marketing and Distribution; Compensation” on page.
(2)If all shares of common stock are sold to investors other than eligible depositorsin a syndicated offering, excluding shares purchased by our directors, officers and borrowersemployees or members of Macon Bank, or their affiliates,immediate families, for which no selling agent commissions would be paid, the maximum selling agent commissionsfees and expenses would be approximately $2.6$1.94 million at the minimum, $3.0$2.30 million at the midpoint, $3.5$2.65 million at the maximum, and $4.0$3.06 million at the adjusted maximum. See “The Conversion and Offering — Marketing and Distribution; Compensation” on page      for a discussion of the fees to be paid to Sandler O’Neill & Partners, L.P. and other Financial Industry Regulatory Authority member firms in the event that all shares are sold in a syndicated offering.

These securities are not deposits or savings accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. None of the Securities and Exchange Commission, the North Carolina Commissioner of Banks, the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, nor any state securities regulator has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

For assistance, please call the Stock Information Center, toll free, at (    )     -     .

Raymond James & Associates, Inc.

The date of this prospectus is[].


LOGO

LOGO


TABLE OF CONTENTS

 

SUMMARY

   1  

RISK FACTORS

13

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

   23  

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTSSELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

   2538  

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

42

HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING

   2543  

OUR POLICY REGARDING DIVIDENDS

   2645  

MARKET FOR THE COMMON STOCK

   2746  

HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE

   2747  

CAPITALIZATION

   2849  

PRO FORMA DATA

   2851  

OUR BUSINESS

56

MANAGEMENT’S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   3169  

OUR BUSINESS

58

SUPERVISION AND REGULATION

66

TAXATION

74

OUR MANAGEMENT

75

SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS

88

THE CONVERSION

89

RESTRICTIONS ON ACQUISITION OF MACON FINANCIAL

104

DESCRIPTION OF CAPITAL STOCK

   107  

EXPERTSTAXATION

   108123  

LEGAL MATTERSOUR MANAGEMENT

   108124  

SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS

146

THE CONVERSION

147

RESTRICTIONS ON ACQUISITION OF ENTEGRA

171

DESCRIPTION OF CAPITAL STOCK

175

EXPERTS

177

LEGAL MATTERS

177

REGISTRATION REQUIREMENTS

178

WHERE YOU CAN FIND ADDITIONAL INFORMATION

   108178  

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

   F-1  

 

i


SUMMARY

The following summary highlights material information in this prospectus. It may not contain all of the information that is important to you. For additional information, you should read this entire prospectus carefully, including the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements.

In this prospectus, the terms “Bancorp” or “Macon Bancorp” mean Macon Bancorp, a North Carolina chartered mutual holding company; “Macon Financial”“Entegra” means MaconEntegra Financial Corp., a North Carolina corporation; and “Bank” or “Macon Bank” mean Macon Bank, Inc., Bancorp’s North Carolina chartered bank subsidiary. Terms such as “we, “our,” and “us” refer collectively to Bancorp, Macon FinancialEntegra and the Bank, unless the context indicates another meaning; and “you” and “your” refer to subscribers of Macon Financial’sEntegra’s common stock.

The Companies

Macon Financial.Entegra.This offering is being made by Macon Financial,Entegra, a newly formed North Carolina corporation thatorganized in 2011 as “Macon Financial Corp.” and renamed “Entegra Financial Corp.” in 2014. Entegra will own all of the outstanding shares of common stock of Macon Bank upon completion of this offering and the mutual-to-stock conversion of Macon Bancorp. Other than matters of an organizational nature, Macon FinancialEntegra has not engaged in any business to date. Following the conversion and the offering, Macon Financial will be renamed “Macon Bancorp”.

Macon Bancorp.Macon Bancorp is a North Carolina chartered mutual holding company headquartered in Franklin, North Carolina. It was organized in 1997, when the Bank converted from a mutual savings bank to a stock savings bank, and owns 100% of the outstanding shares of common stock of the Bank. Bancorp also has one non-bank subsidiary, Macon Capital Trust I, a Delaware statutory trust, formed in 2003 to facilitate the issuance of trust preferred securities. On a consolidated basis, as of MarchDecember 31, 2011,2013, Bancorp had total assets of $932.8$784.6 million, total loans of $667.7$521.9 million, total deposits of $782.1$684.2 million and total equity of $56.3$32.5 million. As a mutual holding company, Bancorp has no shareholders and is controlled by the depositors and borrowers of the Bank.

Pursuant to the terms of our plan of conversion, Macon Bancorp will merge with and into Macon FinancialEntegra and, in doing so, will convert from a mutual form of organization to a stock form of organization. Upon the completion of the conversion, Bancorp will cease to exist, and the Bank will become a wholly-owned subsidiary of Macon Financial which will be renamed “Macon Bancorp”.Entegra.

Macon Bank. Macon Bank is a North Carolina chartered stock savings bank headquartered in Franklin, North Carolina. It was organized in 1922, as a North Carolina chartered mutual savings and loan association. In 1992, it converted to a North Carolina chartered mutual savings bank. In 1997, upon the formation of Bancorp, it converted to a North Carolina chartered stock savings bank.For questions regarding the conversion or the offering, please call our Stock Information Center, toll free, at Macon Bank has one subsidiary, Macon Services, Inc., Monday through Friday betweena.m. andp.m., Eastern Daylight Time. The Stock Information Center will be closed on weekends and bank holidays.which holds real estate for investment.

Our Executive Offices.Our executive offices are located at 220 One Center Court, Franklin, North Carolina 28734 and the telephone number at this address is (828) 524-7000. Our website address iswww.maconbank.com. www.maconbank.com. Information on our website is not incorporated into this prospectus and should not be considered part of this prospectus.

For questions regarding the conversion or the offering, please call our Stock Information Center, toll free, at (        )         -             , Monday through Friday between 10:00 a.m. and 4:00 p.m., Eastern Time. The Stock Information Center will be closed on weekends and bank holidays.

Our Business

Overview.The Bank was organized as a mutual savings and loan association. As a mutual savings and loan association, or “thrift,” for the Bank’s primary purpose was to promoteof promoting home ownership through mortgage lending, financed by locally gathered deposits. Surviving the Great Depression of the 1930’s, we remained a single-office bank until we opened oura second office in downtown Murphy, North Carolina in 1981. Between 1993 and 2002, we added eight more branches in North Carolina, including a second office in Franklin, one in each of Highlands, Brevard, Sylva, Cashiers and Arden, and two in Hendersonville. In 2007, we opened two more branches in Columbus and Saluda, North Carolina.

Today, in addition to our corporate headquarters, weWe have 11 branches located throughout the Westernwestern North Carolina counties of Cherokee, Henderson, Jackson, Macon, Polk and Transylvania, which we consider our primary market area. Our business consists primarily of accepting deposits from individuals and small businesses and investing those deposits, together with funds generated from operations and borrowings, primarily in loans secured by real estate, including commercial real estate loans, one- to four-family residential loans, construction loans, home equity loans and lines of credit. We also originate commercial business loans and invest in investment securities. Through our mortgage loan production operations we originate loans for sale in the secondary markets to Fannie Mae and others, generally retaining the servicing

rights in order to generate cash flow,servicing income, supplement our core deposits with escrow deposits and maintain relationships with local borrowers. We offer a variety of deposit accounts, including savings accounts, certificates of deposit, money market accounts, commercial and regular checking accounts, and individual retirement accounts.

In addition to making loans within our primary market area, weWe also regularly extend loans to customers located in neighboring counties, including Buncombe, Clay, Haywood, Rutherford and RutherfordSwain in North Carolina; Fannin, Rabun, Towns and Union in Georgia; and Cherokee, Greenville, Oconee, Pickens and Spartanburg in South Carolina, which we consider our secondary market area.

We encounter significant competition in ourThe primary and secondary market areas. We compete with commercial banks, savings institutions, finance companies, credit unions and other financial services companies. Manyeconomic drivers of our larger commercial bank competitors have greater name recognition and offer certain services that we do not. However, we believe that our long-time presence in our primary market area are tourism and focus on superior servicea vacation and retirement home industry. This area has numerous small- to mid-sized businesses, which are instrumental to our success and leading deposit market share. Between 2000 and 2010, we increased our share of the combined deposits of all banks and thrifts operating in our primary market area from 9.4%business customers. These businesses include agricultural producers, artisans and specialty craft manufacturers, small industrial manufacturers, and a variety of service oriented industries. The largest employers in 2000Macon County include Drake Software, a national tax software provider, based in Franklin.

A new casino and hotel complex is currently under construction in Cherokee County. The casino and hotel, which will be operated by Caesars Entertainment Corp., are projected to 17.4%create additional employment directly, and indirectly through increased economic activity in 2010, and now lead our competitors in total deposits within our primary market area, as shown below.

Competing Banks and Thrifts

Total

Deposit

Rank

2010

  

Institution

  Institution City  Institution
Headquarters
State
  Total
Active
Branches
2000
   Total
Active
Branches
2010
   Total  deposits
(1)

2000
(thousands)
   Total
Deposit
Market
Share
2000
(%)
  Total  deposits
(1)

2010
(thousands)
   Total
Deposit
Market
Share
2010
(%)
 
1  Macon Bank  Franklin  NC   9     11     250,605     9.4  820,204     17.4
2  

First-Citizens Bank &

Trust Co.

  Raleigh  NC   22     17     490,284     18.4  736,358     15.6
3  Wells Fargo Bank NA  Sioux Falls  SD   14     9     461,851     17.3  489,042     10.4
4  United Community Bank  Blairsville  GA   10     11     296,203     11.1  465,146     9.9
5  

Mountain 1st Bank &

Trust Co.

  Hendersonville  NC   0     6     —       0.0  435,959     9.2
6  TD Bank NA  Wilmington  DE   4     8     157,604     5.9  344,581     7.3
7  Home Trust Bank  Clyde  NC   4     3     211,025     7.9  321,634     6.8
8  RBC Bank (USA)  Raleigh  NC   10     7     313,509     11.8  245,719     5.2
9  Bank of America NA  Charlotte  NC   4     4     144,960     5.4  154,829     3.3
10  SunTrust Bank  Atlanta  GA   5     4     176,660     6.6  149,169     3.2

(1)Total deposits represent the six counties in which Macon Bank has branches.

Source: FDICthe area.

In addition to successfully building our branch network and growing our core deposits, we have sought to createcreated an infrastructure that will accommodate future growth. One of our core strengths has been our successful mortgage loan operation, through which we originate and sell mortgage loans in the secondary markets to Fannie Mae and others. In 1999, we opened a call center to better and more efficiently serve our customers. In 2001, we consolidated our corporate headquarters, loan processing and training facilities into a single 36,000 square foot building in Franklin, North Carolina.Franklin.

We have sought to improvefocus upon continual improvement of our level of service and overall efficiencies through the use of technology, offering online banking for retail customers, which we market asMacon eCom; online banking for businesses, which we market asMacon eCorp; mobile banking; remote deposit capture; and remotemobile deposit capture. We also provide investment services through ouran affiliation with Morgan Stanley/Smith Barney,an independent broker/dealer firm, merchant credit card services for business customers, and ATM services.

Recently, in anticipation of our mutual-to-stock conversion, we added two experienced bankers to supplement our executive management team, W. David Sweatt, Executive Chairman of the Bank, and Gary L. Brown, our First Vice President and Chief Credit Officer. We hired Mr. Sweatt and Mr. Brown because of their experience with commercial lending, resolving problem assets, working with regulatory agreements, and running public companies. Mr. Sweatt has 30 years of banking experience, having held a number of senior executive and operational positions, including chairman, president and chief executive officer, within a variety of financial institutions throughout the Southeast. Mr. Brown has 34 years of banking experience, including president and chief executive officer of a community bank, and most recently, post closing asset manager in the Division of Resolutions and Receiverships of the Federal Deposit Insurance Corporation, Jacksonville, Florida.

We remainare committed to supporting our local communities and offering personal, one-on-one service to our customers. Our employees, officers and directors personally know many of our customers, live within the communities we serve, and play key roles in community organizations. In addition, we sponsor numerous local community events and strive to be a good corporate citizen in all of the communities that we serve. We believe we have a loyal base of employees. Our employees have an average of over nine yearsyears’ service with the Bank. More than one in sixfour of our employees have served the Bank for over 2015 years. We believe that the longevity ofthis employee-service commitment is critical to maintaining personal relationships with our customers. Such longevity of service is exemplified by our President and Chief Executive Officer, Roger D. Plemens, who has served the Bank since 1978, in various capacities, including as a mortgage officer, a manager of mortgage lending, and the chief lending officer. Our guiding principle is simple. We are committed to maintaining our culture of community banking and focused upon bringing value to our customers through innovations, technology, products and services of the 21st century.

Recent Operating Challenges and Losses.History.We grew significantly Along with other community banks in western North Carolina, we experienced rapid expansion in the last decade, increasingperiod leading up to the onset of the recession in 2007, based on the growth enjoyed by the local housing market and economy, and increases in real estate values as a consequence of the attractiveness of our markets as retirement and second home destinations. The majority of our loan portfolio from $333.5 million at December 31, 2000, to a high of $832.6 million at December 31, 2007, before declining to $690.8 million at March 31, 2011. Ourgrowth during this period was represented by construction and development loans, grew from $12.2 million at December 31, 2000,many of which were collateralized by retirement and vacation developments. As a consequence, we and other community banks serving western North Carolina developed a high concentration of construction and development loans.

As compared with the United States generally, the effects of the recession in western North Carolina were amplified and lengthened by the region’s greater reliance on tourism and retirement and vacation real estate development. Unemployment in the region increased to $298.3 million at December 31, 2007, before declining to $154.8 million at March 31, 2011, representing the majorityrecord levels and both residential and commercial real estate values were adversely impacted. Our market concentration in western North Carolina, coupled with our high concentration of our loan growth. Many of these construction and development loans, were collateralized by developments for second homes. As the national housing bubble burst, the value of the collateral for our construction and development loans and our other loans declined. The decline in real estate values and impact of the recession resulted in a significant levelour experiencing prolonged elevated levels of loan defaults.

Accordingly, our level ofdefaults and non-performing assets, increased from $4.6 million at December 31, 2000, to $8.0 million at December 31, 2007, and to $96.7 million at March 31, 2011.

The recent increase in our level of non-performing assets resulted in largesignificant loan loss provisions, large loan losses and high REO expenses. During the three years ended December 31, 2010increased expense as we managed our troubled assets. As a consequence, between 2009 and the quarter ended March 31, 2011, we recorded aggregate net losses of $24.5million. These losses were driven by cumulative provisions for loan losses of $56.8$48.0 million, over the same period. Our total equity has decreased from $88.7 million at December 31, 2008 to $56.3 million at March 31, 2011. The increase in non-performing assets has also negatively impacted our operations by reducing our level of earning assetscapital declined and increasing our level of operating expenses to manage these problem assets. Furthermore, due to our increased risk profile, we increased our level of liquidity, which effectively reduced our net interest income.total assets by $203.8 million in the aggregate.

As a result of the increase in our non-performing assets, the decrease in our equity capital, and other factors, we have received anThis led to increased level of scrutiny from our banking regulators. As described in the section entitled “– Memoranda of Understanding” on page,In 2010, the Bank and Bancorp, have eachrespectively, entered into a Memorandummemorandum of Understanding,understanding, or MOU, with their respective banking regulators. The Bank has agreedregulators; followed, in 2012, by a consent order and written agreement, respectively. See the section entitled “Supervision and Regulation – Regulatory Agreements” on page     .

Aggressive Action. We have aggressively sought to among other things, increase itsaddress these regulatory capital, reduce linesconcerns and resolve the asset quality difficulties brought on by the recession. As illustrated by the following table, since December 31, 2009, we have:

reduced our acquisition and development loans from $190.9 million to $64.9 million;

reduced our total non-performing assets from $44.3 million to $26.1 million;

reduced our real estate owned, or REO, from $22.8 million to $10.5 million; and

charged off an aggregate of credit which are subject$58.8 million, or 7.62% of our total loans as of December 31, 2009.

   As of or for the Year Ended December 31 
   2013  2012   2011  2010  2009 

Total Assets

  $784,554    769,939     874,706    1,021,777    1,078,537  

Total loans

   521,874    560,724     615,549    715,504    771,738  

Acquisition and development loans

   64,927    76,788     112,926    151,894    190,893  

Real estate owned

   10,506    19,755     16,830    21,511    22,829  

Total deposits

   684,226    675,098     750,832    798,419    790,408  

Brokered deposits

   11,528    23,236     78,590    152,920    191,760  

Total capital

   32,518    42,294     43,484    65,968    81,631  

Provision for loan losses

   4,358    7,878     24,116    18,926    21,851  

REO valuation and loss on sale

   4,256    3,292     6,681    5,127    8,690  

REO expense

   1,356    2,156     2,332    870    738  

Net income

   (415  933     (25,980  (14,258  (7,787

Non-performing assets

   26,133    37,482     58,379    81,993    44,267  

Net charge-offs

  $4,981    9,714     24,601    19,503    17,246 

We believe our aggressive efforts to adverse classification, reduce its reliance on volatile liabilities to fund longer term assets, establish and maintain an adequate allowancedate have been successful. Except for loan losses, and establish an enhanced loan loss reserve policy. In addition, the Bank must obtain regulatory approval prior to paying any dividends to Bancorp. Bancorp has agreed to, among other things, not declare or pay any dividends without prior regulatory approval and not take dividends from or otherwise reduce the capitalone of the Bank without prior regulatory approval. The Bank MOU requires it to maintainelevated capital requirements, which we anticipate we will satisfy once the conversion is completed, we believe that we are generally in compliance with the consent order and written agreement.

Recent Improvements in Market Conditions. We have recently observed an improvement in the economic condition of our primary market area. As reflected in the following tables, our market is experiencing a leverage ratiosignificant decline in levels of 8.0%unemployment, and a total risk-based capital ratiorise in household income.

   Unemployment Rate 
   12/31/2013  12/31/2012  12/31/2011  12/31/2010  12/31/2009 

Cherokee, NC

   9.00  12.80  12.90  12.60  15.50

Henderson, NC

   4.90    7.20    7.60    7.50    8.80  

Jackson, NC

   5.80    9.60    9.40    8.80    9.40  

Macon, NC

   7.30     11.10     11.30     10.30     11.40  

Polk, NC

   4.60     7.80     7.70     7.50     8.90  

Transylvania, NC

   6.60     10.10     9.60     9.00     10.00  

North Carolina

   6.60     9.50     9.80     9.70     10.90  

United States

   6.70     7.80     8.50     9.30     9.90  

Source: SNL

   Median Household Income 
   2013   2012   2011 

Cherokee, NC

  $37,906    $35,188    $31,495  

Henderson, NC

   47,465     42,990     39,997  

Jackson, NC

   37,922     36,366     37,593  

Macon, NC

   38,969     36,738     36,173  

Polk, NC

   39,573     42,520     42,005  

Transylvania, NC

   38,758     37,735     38,822  

North Carolina

   44,373     42,900     42,941  

United States

   51,314     50,157     50,227  

Source: SNL

Market Share. We have significant competition in our primary and secondary market areas. We compete with commercial banks, savings institutions, finance companies, credit unions and other financial services companies. Many of 12.0%. At March 31, 2011,our larger commercial bank competitors have greater name recognition and offer certain services that we do not. However, we believe that our long-time presence in our primary market area and focus on superior service distinguish us from our competitors, many of whom operate under different names or are under different leadership as a consequence of the Bank had a leverage ratioeffects of 7.07%,the recent recession and a series of acquisitions and mergers.

Between 2000 and 2013, we increased our share of the combined deposits of all banks and thrifts operating in our primary market area from 9.49% in 2000 to 15.2% in 2013, and now lead all but one of our competitors in total risk-based capital ratiodeposits within our primary market area. The following tables show our deposit market share within the Bank’s primary market area, as of 11.55%.June 30, 2013, the most recent publicly reported figures.

       

Institution

Headquarters

State/Country

  Total
Active
Branches
2000
  Total
Active
Branches
2013
  Total
deposits (1)
2000
  Total
Deposit
Market
Share
2000
  Total
deposits (1)
2013
  Total
Deposit
Market
Share
2013
 

Total Deposit

Rank 2013

               

(thousands)

     

(thousands)

    
   Institution Institution City                     
 1   

First-Citizens Bank & Trust Company(2)

 Raleigh  NC    20    15   $462,981    17.4 $830,036    18.6
 2   

Macon Bank

 Franklin  NC    9    11    250,605    9.4    678,050    15.2  
 3   

Wells Fargo Bank, N.A.

 Sioux Falls  SD    8    8    379,125    14.2    511,674    11.5  
 4   

United Community Bank

 Blairsville  GA    —      10    —      —      455,884    10.2  
 5   

Mountain 1st Bank & Trust Company(2)

 Hendersonville  NC    —      6    —      —      413,762    9.3  
 6   

PNC Bank, N.A.

 Pittsburgh  PA    5    7    205,193    7.7    300,411    6.7  
 7   

HomeTrust Bank

 Clyde  NC    —      3    —      —      267,130    6.0  
 8   

TD Bank, N.A.

 Toronto  Canada    —      7    —      —      242,270    5.4  
 9 �� 

Branch Banking and Trust Company

 Winston-
Salem
  NC    1    5    27,843    1.0    158,850    3.6  
 10   

Bank of America, N.A.

 Charlotte  NC    4    4    144,960    5.4    151,300    3.4  

(1)Total deposits represent the six counties in which Macon Bank has branches.
(2)On January 1, 2014 Mountain 1st Bank & Trust Company merged with and into First-Citizens Bank & Trust Company.

Source - FDIC

The following table shows our deposit market share in each county within our primary market area, as of June 30, 2013, the most recent publicly reported figures.

Deposit Market Share by County 
As of June 30, 2013 

County

  Deposit Market
Share Rank
   Market
Share
 

Cherokee County

   4     11.7

Henderson County (1)

   6     5.3  

Jackson County

   3     19.4  

Macon County

   1     38.0  

Polk County

   2     17.5  

Transylvania County

   4     12.8  

(1)After giving effect to the merger of Mountain 1st Bank & Trust Company with and into First-Citizens Bank & Trust Company.

Source - FDIC

Operating Strategy and Reasons for the Conversion.Conversion

We have developed an operating strategy to reposition the Bank so that it may return to sustained profitability and explore opportunities for growth. However, weWe need a significant amount of capital to execute this strategy, and we cannot raise this level of capital as a mutual financial institution. We have considered current market conditions and the amount of capital needed in deciding to conduct the conversion at this time, and have established the following three-partfour-part operating strategy in order to effectively and efficiently use the proceeds from the offering.

Pursue Opportunities in Existing Markets.

Address Current Challenges.Our first priority is to reduce our level of non-performing and classified assets both in the aggregate and as a percentage of total assets. We also want to be in full compliance with our MOUs as quickly as possible.

Improve asset quality.As described in the section entitled “” on page, our non-performing assets have increased during the current adverse credit cycle and were $96.7 million or 10.36% of our total assets at March 31, 2011. During 2010, management appointed an experienced special assets manager and reassigned employees as support staff to increase collection efforts, expedite foreclosure actions, and liquidate real estate owned. We are aggressively addressing our level of non-performing assets through write-downs, collections, modifications and sales of non-performing loans and the sale of properties once they become real estate owned by the Bank. For the years 2007 through 2010 and through March 31, 2011, we have recorded cumulative net charge-offs of approximately $46.0 million. We are taking proactive steps to resolve our non-performing loans, including negotiating repayment plans, loan modifications and loan extensions with our borrowers when appropriate, working with developers to promote discounted sales events to increase sales and accepting short payoffs on delinquent loans, particularly when such payoffs result in a smaller loss to us than foreclosure. In late 2010, management increased the frequency for problem loan appraisals to six to 12 month intervals, from 12 to 24 months, which resulted in additional loan write-downs. In 2010 and the first quarter of 2011, the Bank liquidated $28.7 million in real estate owned based on loan values at the time of foreclosure, realizing $15.9 million in net proceeds or 55.3% of the foreclosed loan balances. The Bank’s current real estate owned portfolio is comparably valued at 59.8% of loan value at the time of foreclosure. In addition to continuing to pursue the above steps to improve our asset quality, we may consider bulk sales of non-performing assets in order to expedite our strategy for improving asset quality, although we have no firm plans to do so at this time.

We have taken several actions to improve our credit administration practices and reduce the risk in our loan portfolio. We also added experienced personnel, including Gary Brown who was appointed Chief Credit Officer in February, 2011, to our loan department to enable us to better identify problem loans in a timely manner and reduce our exposure to a further deterioration in asset quality. Also, since 2008, we have regularly engaged an independent loan review consulting firm to perform a review of our loan portfolio. The Bank has added new support systems that have improved our underwriting global cash flow analysis, portfolio credit risk assessment, risk grade migration, and loan loss allowance calculation. We have made an effort to reduce our exposure to riskier types of loan structures and collateral both through

asking borrowers to pledge additional collateral and by reducing certain segments of our loan portfolio. We have reduced our construction and other construction and land development loan portfolio from $298.3 million at December 31, 2007 to $154.8 million at March 31, 2011.

Compliance with Memoranda of Understanding.As described in the section entitled “– Memoranda of Understanding” on page, we have taken and continue to take prompt and aggressive action to respond to the issues raised in the Memoranda, including submitting quarterly reports to our banking regulators. Except for the elevated capital requirements, which we anticipate we will satisfy once the conversion is completed, we believe that we are generally in compliance with the Memoranda. However, the Memoranda will each remain in effect until modified, terminated, lifted, suspended or set aside by the applicable banking regulators, and no assurance can be given as to the time that either of the Memoranda will be terminated. While we will seek to demonstrate as soon as possible to our banking regulators that we have fully complied with the requirements of the Memoranda and that they should be terminated, we expect that the Memoranda will remain in effect for the immediate future.

Restore Profitability.Until the current adverse credit cycle, the Bank enjoyed a long history of strong earnings, continuously reporting a profit every year from 1982 through 2008. While we expect to record losses as we continue to resolve non-performing assets, we are focused on returning to profitability.

Improve our net interest margin.Net interest income is our largest source of revenue. Our net interest margin has declined over the past four years. The increase in non-earning assets, especially non-accrual loans and real estate owned, has factored into this decline. We have also maintained an elevated level of liquidity as a result of reduced loan demand in recent periods, which has contributed to our reduced net interest margin. We believe that our net interest margin will improve as we resolve non-performing assets and invest those proceeds into earning assets. Additionally, we took the step of prepaying $42.5 million of high-cost Federal Home Loan Bank advances in the first quarter of 2011, which we anticipate will result in an increase in net interest income. Finally, we are working to further improve our base of core deposits and lower our cost of funds.

Increase noninterest income.The majority of the Bank’s noninterest income is the result of our mortgage banking business and customer service fees. We believe that we have the opportunity to increase noninterest income by adding additional lines of business. We have plans to become an active lender of Small Business Administration, or SBA, loans and would hope to sell the SBA guaranteed portion of those loans at a gain. We also believe that expanding our focus on small business and private banking customers will increase our opportunities to earn noninterest income.

Continue history of operating expense discipline. Our core efficiency ratio for the quarter ended March 31, 2011 was 67.7%, reflecting the increased expense related to resolving non-performing assets. Historically we have operated more efficiently on a core basis. For the five years 2006 through 2010, our average core efficiency ratio was under 60.0%. This success is the result of a disciplined approach to spending. We have also leveraged technology to drive efficiency throughout our organization. We recently renegotiated our data processing contract and are planning to convert to a debit card processing platform, which we anticipate will result in substantial savings in 2011, and in future years. While our level of core operating expenses will increase as a public company and we will continue to incur expenses to resolve non-performing assets, we are committed to carefully managing expenses.

Increase Small Business and Private Banking Customer Focus and Explore Growth Opportunities.As we implement our operating strategy, we will work to diversify our customer base, and explore various growth opportunities, including those described below. We have no current arrangements or agreements concerning any specific growth opportunities at this time.

Increase small business and private banking customer focus.We believe that we can enhance our franchise value by increasing our focus on small business and private banking customers. We believe that small business and private banking customers value the personalized service that has been our hallmark. These customers also present attractive loan and deposit opportunities that will allow us to diversify our loan portfolio and further increase our level of core deposits. The new members of our management team have substantial experience targeting these types of banking customers. We have enhanced training for our existing lenders in commercial and industrial, and SBA lending. Additionally, we will hire lenders, relationship officers and credit officers experienced in these areas as we grow these lines of business.

Expand into larger, contiguous markets. We are located in close proximity to a number of larger markets with attractive growth opportunities. Many of these markets have a high number of attractive small business and private banking customers. In addition to diversifying our customer mix, these markets would provide geographic diversification for our lending collateral. For instance, we have existing branch offices located near Asheville, North Carolina (30 minutes traveling

time along I-26), northwest of Spartanburg, South Carolina (30 minutes traveling time along I-26); and northwest of Greenville, South Carolina (1 hour traveling time along I-26 and I-85). We are also located near Atlanta, Georgia (2 hours), Chattanooga, Tennessee (1.5 hours), Knoxville, Tennessee (2 hours) and Johnson City, Tennessee (1.5 hours).

Capitalize on market disruption.We anticipate that both current and expected consolidation within the banking industry and the increasing number of troubled banks will give rise to attractive growth opportunities. As a result of mergers between banks and recent bank failures, we believe that many customers and bankers may become dissatisfied with their new bank. Many banks do not have sufficient capital to make new loans and are having to cut back on customer service as they focus on managing their problems. We believe that these challenges will result in customer dissatisfaction, which will present us with a better opportunity to do business with these customers. Additionally, we believe that bankers will be dissatisfied with their current employers, and we will have the opportunity to hire away experienced personnel. We believe that we have the appropriate infrastructure and management depth to accommodate future growth, including our use of technology, mortgage loan production operations, call center, and corporate headquarters with centralized loan processing and training facilities.

Organic growth.We are well-established in our primary market area, leading our competitors inwith a 38.0% deposit market share as of June 30, 2010, according to the most recent publicly reported figures. We believe that this solid market position will allow us to continue to increase our market share. We also believe our core strengthin Macon County and a 15.2% share in our primary market will enable us toarea. We believe that we have a solid platform from which we can increase our existing market share and grow into adjacent areas. We have experience opening offices in new markets, having successfully entered new markets in the 1990’s and 2000’s. We are already making loans in a number of adjacent counties, some of which have similar demographics to our primary market area. We will consider opportunities as they arise to open loan production offices or branch offices in adjacent markets, particularly markets in which we have lending experience.

Future acquisition opportunities.Capitalize on market disruption. While we are currently focused on repositioning the BankThe recession has adversely affected our competitor community banks in the near term, we expect to be able to consider acquisition opportunitieswestern North Carolina. Since 2007, many of our competitors have undergone changes in the future. Smaller banks may struggle to support anticipated compliance costs resulting from the adoption of last year’s Dodd-Frank Wall Street Reform and Consumer Protection Act. Additionally, smaller banks have fewer ways to raise the capital they need to address current problems and support growth.name, management or ownership. We believe that these two factors will leadchanges, coupled with resulting key personnel changes, reorganizations and branch closures have been disruptive to many smaller banksof their existing customer relationships, and that many customers and bankers are dissatisfied with their bank. By contrast, during this period we have maintained stable customer relations through our long-serving employees and established branch network, as evidenced by our leading deposit market share.

We believe that we have a unique opportunity to seek a merger partner. Additionally,attract new customers and hire additional experienced personnel from our competitors. We believe that we expecthave the appropriate infrastructure and management depth to see other banks sell branches either to shrink their balance sheet or toaccommodate future growth, including our use of technology, mortgage loan production operations, call center, and corporate headquarters with centralized loan processing and training facilities.

Diversify Geography and Product Mix and Explore Growth Opportunities.

Increase our small and middle market commercial banking business. We believe that we can enhance our franchise value by increasing our focus on coresmall and middle market businesses. Our current loan portfolio is heavily dependent on real estate in western North Carolina, and the majority of the Bank’s noninterest income is the result of our residential mortgage banking business and retail customer service fees. Our goal is to expand our commercial banking services to small- and medium-sized businesses to further diversify our risk profile and increase our noninterest income by attracting additional commercial deposit accounts and adding additional lines of business, including SBA lending and commercial banking.

Explore lending opportunities in larger, contiguous markets. We are located in close proximity to a number of larger markets with attractive growth opportunities, including Asheville and Charlotte, North Carolina, and Greenville, South Carolina. Many of these markets have a high number of small business and private banking customers. In addition to diversifying our customer mix, these markets would provide geographic diversification for our lending collateral.

Continue to Improve Asset Quality.While asset quality has improved significantly over the last several years, at December 31, 2013 classified (including substandard loans, real estate owned and real estate held for investment) and nonperforming assets remain elevated, at $60.0 million and $26.1 million, respectively (down from highs of $134.7 million and $82.0 million, respectively, at December 31, 2010). Although we believe that the majority of losses from defaults and problem assets are behind us, resolution of the remaining classified and nonperforming assets is likely to result in some level of additional losses. Additionally, for so long as we remain subject to a consent order and a written agreement with our banking regulators we will carefully evaluate any future acquisition opportunitybe subject to understandheightened regulatory scrutiny and restrictions on our business. As soon as possible following the potential impacts, both positive and negative, alongconversion, we will seek to demonstrate to our banking regulators that we have fully complied with the risksrequirements of these regulatory agreements and that they should be terminated. If we are successful and the regulatory agreements are terminated, we will be able to pursue certain attractive business opportunities that are currently prohibited, such as the establishment of loan production offices. See the section entitled “Supervision and Regulation – Regulatory Agreements” on page     .

Improve Profitability.

Continue to reduce problem asset expenses and losses. As illustrated in the table below, the Bank has experienced a declining level of loan loss provisions and losses from the valuation and sale of real estate owned, or REO. Based on the reduced level of problem assets, the Bank expects this declining trend of expenses and losses to continue.

   2013   2012   2011 

Provision for loan losses

  $4,358    $7,878     24,116  

REO valuation and loss on sale

   4,256     3,292    $6,681  

Real Estate Owned Expense

   1,356     2,156    $2,332  
  

 

 

   

 

 

   

 

 

 

Total

  $9,970    $13,326     33,129  
  

 

 

   

 

 

   

 

 

 

Grow net interest income.Net interest income is our largest source of revenue and is dependent on a combination of volume, mix and interest rates of interest earning assets and liabilities. As illustrated in the table below, during 2013, the benefit from an improvement in interest rate spread was more than offset by a reduction in volume. With the benefit of additional capital, we intend to increase loan volumes in the future which will have a positive impact on our level of net interest income. As discussed above, we intend to diversify our current geography and product mix by expanding our commercial banking operations in markets outside of western North Carolina.

   2013 (1)  2012 (1) 

Improved interest rate spread

  $1,098    2,473  

Lower net earning asset levels

   (1,641  (3,199
  

 

 

  

 

 

 

Net impact

  $(543  (726
  

 

 

  

 

 

 

(1)Calculated on a tax-equivalent basis

Deferred tax asset. As of December 31, 2013, we had a deferred tax asset of $26.8 million, gross of a $22.6 million deferred tax valuation allowance. Over time, to the extent we are successful in achieving a consistent level of earnings, we may be able to reduce some or all of the deferred tax valuation allowance, which will further improve our earnings in the period of the reversal, and our financial condition. For additional information see “            ” on page     .

Continue history of strong core earnings.Our headquarters in western North Carolina provides a low cost environment for operating many of the core functions of the Bank. In addition, we carefully monitor and control our spending and heavily utilize technology to drive efficiencies. These actions have generally resulted in a core efficiency ratio under 70% as illustrated in the table below. While our level of core operating expenses will increase as a public company, planned growth in net interest income and noninterest income as discussed above will help to mitigate any transaction.increase in our efficiency ratio.

Our operating expense discipline, combined with our focus on maintaining a healthy net interest margin, has resulted in core earnings of $9.7 million and $10.0 million in 2013 and 2012, respectively, as detailed in the table below. We utilize a core efficiency ratio and core earnings measurement as a means of measuring our operating expenses and earnings prior to the effect of credit-related costs and non-recurring gains and losses. For additional information on the use of these measurements, which are not calculated in accordance with accounting principles generally accepted in the United States see “Selected Consolidated Financial and Other Data” on page     .

   2013  2012  2011 

(Dollars in thousands)

    

Core efficiency ratio

   68.1  65.4  70.5

Core earnings, before taxes

  $9,672   $9,954   $6,888  

For further information about our reasons for the conversion and offering, please see “–“The Conversion – Reasons for the Conversion” on page.

Terms of the Conversion and the Offering

Under the plan of conversion, Bancorp will merge with and into Macon Financial,Entegra, and, in doing so, will convert from a mutual form of organization to a stock form of organization. Upon the completion of the conversion, Bancorp will cease to exist, and the Bank will become a wholly-owned subsidiary of Macon Financial, which will be renamed “Macon Bancorp.”Entegra. In connection with the conversion, Macon FinancialEntegra is offering between 4,250,0003,655,000 and 5,750,0004,945,000 shares of common stock to eligible depositors and borrowers of the Bank in a “subscription offering,” and, if shares remain available, to the general public in a “community offering.” To the extent shares remain available after the community offering, we may also offer for sale, shares of common stock to the general public in a “syndicated offering,” managed by Raymond JamesSandler O’Neill & Associates, Inc.Partners, L.P. The number of shares of common stock to be sold may be increased up to 6,612,5005,686,750 to reflect regulatory considerations, changes in market and financial conditions, and/or demand for the common stock. Unless the number of shares of common stock to be offered is increased to more than 6,612,5005,686,750 or decreased to less than 4,250,0003,655,000 or the offering is extended beyond [],            ], subscribers will not have the opportunity to change or cancel their stock orders.

The purchase price of each share of common stock to be issued in the offering is $10.00. All investors will pay the same purchase price per share. Investors will not be charged a commission to purchase shares of common stock in the offering.

Persons Who May Order Shares of Common Stock in the Offering

We are offering the shares of common stock in a “subscription offering” in the following descending order of priority:

First, to eligible depositors of the Bank with aggregate account balances of at least $100.00 as of the close of business on December 31, 2009.

2012.

 

Second, to eligible depositors of the Bank with aggregate account balances of at least $100.00 as of the close of business on [, 2011].

Second, to eligible depositors of the Bank with aggregate account balances of at least $100.00 as of the close of business on [supplemental eligibility date].

 

Third, to other eligible depositors and borrowers of the Bank as of the close of business on[Voting Record Date for Special Meeting].

Shares of common stock not purchased in the subscription offering may be offered for sale in a “community offering” to members of the general public, with a preference given to natural persons residing in Buncombe, Clay, Cherokee, Graham, Haywood, Henderson, Jackson, Macon, Polk, Swain and Transylvania Counties, North Carolina, and Rabun County, Georgia. The community offering may begin concurrently with, during or promptly after the subscription offering as we may determine at any time. If shares remain available for sale following the subscription offering or community offering, we also may offer for sale shares of common stock through a “syndicated offering” managed by Raymond JamesSandler O’Neill & Associates, Inc.Partners, L.P. We have the right to accept or reject, in our sole discretion, orders received in the community offering or syndicated offering.

To ensure a proper allocation of stock, each subscriber eligible to purchase stock in the subscription offering must list on his, her or its stock order form all loans and/or deposit accounts in which he, she or it had an ownership interest at the applicable eligibility date(s). Failure to list all loans and accounts, or providing incorrect information, could result in the loss of all or part of a subscriber’s stock allocation. Our interpretation of the terms and conditions of the plan of conversion and of the acceptability of the order forms will be final.

If we receive orders for more shares than we are offering, we may not be able to fully or partially fill your order. Shares will be allocated first, in the order of priority, to subscribers in the subscription offering before any shares are allocated in the community offering and, in turn, the syndicated offering.

For a detailed description of the offering, including share allocation procedures, please see “The Conversion” on page.

How We Determined the Offering Range

The amount of common stock that we are offering is based on an independent appraisal of Macon Financial’sthe estimated market value of Entegra assuming the conversion and the offering are completed. RP Financial, L.C.,LC, our independent appraiser, has estimated that, as of May 13, 2011, theFebruary 14, 2014, this market value was $50.0 million. The market value constitutes theranged from $36.6 million to $49.5 million, with a midpoint of a valuation range, with a minimum of $42.5 million and a maximum of $57.5$43.0 million. Based on this valuation and a $10.00 per share price, the number of shares of common stock being offered for sale ranges from 3,655,000 shares to 4,945,000 shares. We may sell up to 5,686,750 shares of common stock (up to a market value the offering ranges from a minimum of 4,250,000$56.9 million) because of demand for shares to a maximum of 5,750,000 shares, with a midpoint of 5,000,000 shares. To reflect regulatory considerations,or changes in market conditions. The $10.00 per share price was selected primarily because it is the price most commonly used in mutual-to-stock conversions of financial institutions.

The appraisal is based in part on Macon Bancorp’s financial condition and financial conditions, and/or demand forresults of operations, the pro forma effect of the additional capital raised by the sale of shares of common stock the market value can be increased to $66.1 million, andin the offering, can be increased to 6,612,500 shares.

RP Financial advised our Board of Directors that the appraisal was prepared in conformance with the regulatory appraisal methodology. That methodology requires a valuation based onand an analysis of the trading pricesa peer group of comparable public companies whose stocks haveten publicly traded for at least one year prior to the valuation date.savings institutions that RP Financial, selected a group of 11LC, considers comparable public companies for this analysis that comprised the peer group for valuation purposes. Consistent with applicable appraisal guidelines, the appraisal applied three primary methodologies: the pro forma price-to-book value approach applied to both reported book value and tangible book value; the pro forma price-to-earnings approach applied to reported and core earnings; and the pro forma price-to-assets approach. Based on RP Financial’s belief that asset size is not a strong determinant of market value, RP Financial did not place significant weight on the pro forma price-to-assets approach in reaching its conclusions. Since Bancorp’s price-to-earning multiples were not meaningful due to its negative pro forma earnings, RP Financial placed the greatest emphasis on the price-to-book and price-to-tangible book approaches in estimating pro forma market value. The market value ratios applied in the three methodologies were based upon the current market valuations of the peer group companies identified by RP Financial, subject to valuation adjustments applied by RP Financial to account for differences between us and the peer group. Downward adjustments were applied in the valuation for financial condition and profitability, growth and viability of earnings, our primary market area, capacity to pay dividends, marketing of the common stock and the effect of government regulations and regulatory reform. No adjustment was applied in the valuation for liquidity of the common stock. The downward valuation adjustments considered, among other factors, less favorable asset quality, weaker earnings, the Bank MOU, the Bancorp MOU and our primary market area (lower per capita income and higher unemployment) versus the peer group and the valuation considerations applied by potential investors in

purchasing a newly issued stock that has no prior trading history in a volatile market for thrift and savings bank common stock.us.

The appraisal peer group consists of the following 10 companies, with the asset sizes as of MarchDecember 31, 2011,2013, unless otherwise stated.

 

Company Name and Ticker Symbol

  Exchange  Headquarters  Total Assets 
   (in millions) 

CFS Bancorp, Inc. (CITZ)

  NASDAQ  Munster, IN  $1,122 (1) 

Community Financial Corp. (CFFC)

  NASDAQ  Staunton, VA  $528 (1) 

First Clover Leaf Financial Corp. (FCLF)

  NASDAQ  Edwardsville, IL  $575 (1) 

First Defiance Financial Corp. (FDEF)

  NASDAQ  Defiance, OH  $2,062  

First Savings Financial Group, Inc. (FSFG)

  NASDAQ  Clarksville, IN  $513  

HF Financial Corp. (HFFC)

  NASDAQ  Sioux Falls, SD  $1,207  

Home Bancorp, Inc (HBCP)

  NASDAQ  Lafayette, LA  $700  

HopFed Bancorp, Inc. (HFBC)

  NASDAQ  Hopkinsville, KY  $1,083 (1) 

MutualFirst Financial Inc. (MFSF)

  NASDAQ  Muncie, IN  $1,407 (1) 

Pulaski Financial Corp. (PULB)

  NASDAQ  St. Louis, MO  $1,338  

Teche Holding Company (TSH)

  NASDAQ  New Iberia, LA  $754 (1) 

Company Name and Ticker Symbol

  Exchange   Headquarters  Total
Assets
 
          (in millions) 

United Community Financial Corp. (UCFC)

   NASDAQ    Youngstown, OH  $1,756 (1) 

HomeTrust Bancshares Inc. (HTBI)

   NASDAQ    Asheville, NC  $1,629  

Pulaski Financial Corp. (PULB)

   NASDAQ    Saint Louis, MO  $1,294  

Franklin Financial Corp. (FRNK)

   NASDAQ    Glen Allen, VA  $1,075  

ASB Bancorp Inc (ASBB)

   NASDAQ    Asheville, NC  $733  

First Savings Financial Group (FSFG)

   NASDAQ    Clarksville, IN  $687  

First Clover Leaf Financial Corp. (FCLF)

   NASDAQ    Edwardsville, IL  $647 (1) 

Cheviot Financial (CHEV)

   NASDAQ    Cheviot, OH  $587  

United Community Bancorp (UCBA)

   NASDAQ    Lawrenceburg, IN  $512  

Wayne Savings Bancshares (WAYN)

   NASDAQ    Wooster, OH  $410  

 

(1) 

Figures as of December 31, 2010.

September 30, 2013.

The following table presents a summary of selected pricing ratios for us and our peer group companiesEntegra (on a pro forma basis). The pricing ratios and the peer group companies identified by RP Financial, LC. Ratios for the peer group are based on earningsequity and other informationearnings as of andor for the 12twelve months ended MarchDecember 31, 2011,2013 (or the last twelve months for which data are available) and stock price information as of May 13, 2011,February 14, 2014. Ratios for Entegra are based on equity as reflected in RP Financial’s appraisal report, dated May 13, 2011,of December 31, 2013 and net income for the number of shares assumed to be outstanding as described in “Pro Forma Data.” Compared to the average pricing of the peer group, our pro forma pricing ratios at the maximum of the offering range indicated a discount of 25.7% on a price-to-book value basis and a discount of 31.7% on a price-to-tangible book value basis.year ended December 31, 2013. Compared to the median pricing of the peer group, our pro forma pricing ratios at the maximum of the offering range indicated a discount of 24.5%27.4% on a price-to-book value basis and a discount of 38.0%31.9% on a price-to-tangible book value basis. This means that, at the maximum of the offering range, a share of our common stock would be less expensive than the peer group on a book value and tangible book value basis.

 

  Price-to-Earnings
Multiple
 Price to
Book Value
 Price to Tangible
Book Value
   Price-to-Earnings
Multiple
 Price to
Book Value
 Price to Tangible
Book Value
 

Macon Financial (pro forma):

    

Entegra (pro forma):

    

Maximum, as adjusted, of offering range

   NM  55.62  55.62   NM 66.14 66.14

Maximum of offering range

   NM  52.00    52.00     NM 62.70   62.70  

Midpoint of offering range

   NM  48.33    48.33     NM 59.17   59.17  

Minimum of offering range

   NM  44.21    44.21     NM 54.95   54.95  

Peer group companies:

        

Average

   14.29  70.01    76.14     20.23   88.13 93.57

Median

   12.07  68.85    83.84     18.24   86.30   92.06  

 

*

Not meaningful

WeOur Board of Directors carefully reviewed RP Financial’s appraisal report, including the information provided to usmethodology and assumptions used by RP Financial, throughand determined that the appraisal process, but did not make any determination regarding whether prior standard mutual-to-stock conversions have been undervalued. Instead, we engaged RP Financial to help us understand regulatory guidance as it applies to the appraisalvaluation range was reasonable and to adviseadequate. The purchase price of $10.00 per share was determined by our Board of Directors, as to how much capital we wouldtaking into account that the common stock should be required to raise underoffered in a manner that will achieve the regulatory appraisal guidelines.widest distribution of the common stock and the desired liquidity in the common stock after the offering.

RP Financial will update the independent appraisal prior to the completion of the conversion. If the estimated appraised value, including offering shares, changes to either below $42.5$36.6 million or above $66.1$56.9 million, we will resolicit persons who submitted stock orders, giving them an opportunity to change or cancel their orders. See “–“The Conversion – Share Pricing and Number of Shares to be Issued” on page     .

The independent appraisal does not indicate per share market value. You should not assume or expect that theour valuation of RP Financial as indicated in the appraisal described above means that, after the conversion and the offering, our shares of

common stock will trade at or above the $10.00 offering price. Furthermore, the pricing ratios presented above were utilized by RP Financial to estimate our market value and not to compare the relative value of shares of our common stock with the value of the capital stock of the peer group. The value of the capital stock of a particular company may be affected by a number of factors such as financial performance, asset size and market location.

For a more complete discussion of the amount of common stock we are offering for sale and the independent appraisal, including a comparison of selected pro forma pricing ratios compared to pricing ratios of the peer group, see “–“The Conversion – Share Pricing and Number of Shares to be Issued” on page.

Limits on How Much Common Stock You May Purchase

The minimum number of shares of common stock that may be purchased is 25. Generally, no individual may purchase more than 75,00030,000 shares ($750,000)300,000) of common stock in any single category of the offering,i.e., the subscription offering, the community offering or the syndicated offering; or 125,00050,000 shares ($1,250,000)500,000) of common stock in all categories of the offering. If any of the following persons purchases shares of common stock, then, unless the maximum purchase limitations are increased, their purchases, in all categories of the offering, when combined with your purchases, cannot exceed 125,00050,000 shares ($1,250,000)500,000):

 

your spouse or relatives of you or your spouse living in your house;

 

most companies, trusts or other entities in which you are a trustee, have a substantial beneficial interest or hold a senior management position; or

 

other persons who may be your associates affiliates or persons acting in concert with you.

See the detailed descriptions of “acting in concert,” “affiliate”concert” and “associate” in “–“The Conversion – Limitations on Common Stock Purchases” on page.

We may decrease or increase the purchase limitations to not more than 4.99%at any time with the approval of the shares issued inBoard of Governors of the offering.Federal Reserve System and the North Carolina Commissioner of Banks. In the event that the maximum purchase limitation is increased to 4.99%, this limitation may be further increased to 9.99%, provided that orders for common stock exceeding 4.99% shall not exceed in the aggregate 10% of the shares of common stock issued in the offering. See “–“The Conversion – Limitations on Common Stock Purchases” on page.

How You May Purchase Shares of Common Stock

In the subscription offering and community offering, you may pay for your shares only by:

 

delivering a personal check, money order or bank draft made payable to “Macon“Entegra Financial Corp.”; or

authorizing us to withdraw funds from the types of deposit accounts with the Bank permitted on the stock order form.

We will not lend funds to anyone for the purpose of purchasing shares of common stock in the offering. Additionally, you may not submit a check drawn on a Macon Bank line of credit to pay for shares of common stock. Please do not submit cash.

You can subscribe for shares of common stock in the offering by delivering a signed and completed original stock order form, together with full payment or authorization to withdraw from one or more of your Macon Bank deposit accounts, so that it is received (not postmarked) before 4:00 p.m., Eastern Daylight Time, on [expiration date], which is the expiration of the offering period. You may submit your stock order form by mail using the order reply envelope provided or by overnight courier to our Stock Information Center, at the address indicated on the order form. We will not accept faxed order forms. Other than our Stock Information Center, we will not accept stock order forms at our banking offices.

Personal checks will be immediately cashed, so the funds must be available within the account when your stock order form is received by us. Subscription funds submitted by check or money order will be held in a segregated account at Macon Bank until completion or termination of the offering. We will pay interest calculated at the Bank’s tier 1 statement savings rate from the date those funds are received until completion or termination of the offering. Withdrawals from certificate of deposit accounts to purchase common stock in the offering may be made without incurring an early withdrawal penalty. All funds authorized for withdrawal from deposit accounts with the Bank must be available within the deposit accounts at the time the stock order form is received. A hold will be placed on the amount of funds designated on your stock order form. Those funds will be unavailable to you during the offering; however, the funds will not be withdrawn from the accounts until the offering is completed and will continue to earn interest at the applicable contractual deposit account rate until the completion of the offering.

You may be able to subscribe for shares of common stock using funds in your individual retirement account or other retirement account. If you wish to use some or all of the funds in your individual retirement account held at the Bank or other retirement accounts held at the Bank to purchase our common stock, the applicable funds must first be transferred to a self-directed account maintained by an independent trustee, such as a brokerage firm, and the purchase must be made through that account. Because individual circumstances differ and processing of retirement fund orders takes additional time, we recommend that you contact our Stock Information Center promptly, preferably at least two weeks before [expiration date], the expiration of the offering period, for assistance with purchases using funds from any retirement account held at the Bank or any retirement account that you may haveelsewhere. Whether you may use such funds for the purchase of shares in the

offering may depend on time constraints and, possibly, limitations imposed by the brokerage firm or institution where your funds are held.

See “– Procedure for Purchasing Shares” on pagefor a complete description of how to purchase shares in the offering.

Deadline for Orders of Common Stock

The deadline for purchasing shares of common stock in the offering is 4:00 p.m., Eastern Daylight Time, on[, 2011]2014]. Your stock order form, with full payment, must bereceived(not postmarked) by 4:00 p.m., Eastern Daylight Time on[, 2011]2014].

Although we will make reasonable attempts to provide a prospectus and offering materials to holders of subscription rights, the subscription offering and all subscription rights will expire at 4:00 p.m., Eastern Daylight Time, on[, 2011]2014], whether or not we have been able to locate each person entitled to subscription rights.

See “– Procedure for Purchasing Shares” on page 129 for a complete description of how to purchase shares in the offering.

Delivery of Shares of Common Stock in the Subscription and Community Offerings

Information regardingAll shares of common stock sold will be issued in book entry form. Stock certificates will not be issued. A statement reflecting ownership of shares of common stock issued in the subscription and community offerings or in any syndicated offering will be mailed by regular mailour transfer agent to the persons entitled thereto at the stock registration address noted by them on thetheir stock order form,forms as soon as practicable following consummation of the conversion and offering. We expect trading in the stock to begin on the day of completion of the conversion and offering.offering or the next business day. The conversion and offering are expected to be completed as soon as practicable following satisfaction of the conditions described above in “– Conditions to Completion of the Conversion and the Offering.”It is possible that until this informationa statement reflecting ownership of shares of common stock is available and delivered to purchasers, maypurchasers might not be able to sell the shares of common stock that they ordered,purchased, even though the common stock will have begun trading.In order Your ability to reduce non-essential costs, we do not intend to issue paper stock certificates, unless a shareholder specifically requests a paper stock certificate. Instead, except for shareholders who specifically request a paper stock certificate, the holdingssell your shares of each shareholder will be recorded in “book entry” form on our records and we will issue shareholders a written statement, containing all of the information usually provided in the certificate.

After-Market Stock Price Performance Provided by Independent Appraiser

The following table presents stock price performance information for all reported standard mutual-to-stock conversions completed between January 1, 2010 and May 13, 2011. None of these companies was included in the group of 11 comparable public companies utilized in RP Financial’s valuation analysis.

Mutual-to-Stock Conversion Offerings with Closing Dates

between January 1, 2010 and May 13, 2011

               Price Performance from Initial Trading Date (1) 

Transaction

  

Exchange

   Closing Date   Offering Size   1 Day  1 Week  1 Month  5-13-2011 
           ($ in millions)              

NASDAQ Listed Companies

           

Franklin Financial Corp. (FRNK)

   NASDAQ     04/28/11    $138.9     19.7  17.7  NA    18.0

Anchor Bancorp (ANCB)

   NASDAQ     01/26/11    $25.5     0.0  0.3  4.5  -4.4

Wolverine Bancorp, Inc. (WBKC)

   NASDAQ     01/20/11    $25.1     24.5  22.4  35.0  49.0

SP Bancorp, Inc. (SPBC)

   NASDAQ     11/01/10    $17.3     -6.0  -6.6  -8.0  18.6

Standard Financial Corp. (STND)

   NASDAQ     10/07/10    $33.6     19.0  18.9  29.5  54.0

Peoples Federal Bancshares, Inc. (PEOP)

   NASDAQ     07/07/10    $66.1     4.0  6.9  4.2  42.4

OBA Financial Services, Inc. (OBAF)

   NASDAQ     01/22/10    $46.3     3.9  1.1  3.0  48.0

OmniAmerican Bancorp, Inc. (OABC)

   NASDAQ     01/21/10    $119.0     18.5  13.2  9.9  46.2

Athens Bancshares, Inc. (AFCB)

   NASDAQ     01/07/10    $26.8     16.0  13.9  10.6  35.5

Sunshine Financial, Inc. (SSNF)

   OTC     04/06/11    $12.3     12.5  11.0  14.0  14.0

Fraternity Community Bancorp (FRTR)

   OTC     04/01/11    $15.9     10.0  11.7  10.0  4.0

Madison Bancorp, Inc. (MDSN)

   OTC     10/07/10    $6.1     25.0  25.0  25.0  5.0

Century Next Financial Corp. (CTUY)

   OTC     10/01/10    $10.6     25.0  15.0  10.0  60.0

United-American Savings Bank (UASB)

   OTC     08/06/10    $2.5     0.0  -5.0  5.0  30.5

Fairmont Bancorp, Inc. (FMTB)

   OTC     06/03/10    $4.4     10.0  20.0  10.0  65.0

Harvard Illinois Bancorp, Inc. (HARI)

   OTC     04/09/10    $7.9     0.0  0.0  -1.0  -10.0

Versailles Financial Corp. (VERF)

   OTC     01/13/10    $4.3     0.0  0.0  0.0  0.0

Average

      $33.1     10.7  9.7  10.1  29.8

Median

      $17.3     10.0  11.7  10.0  30.5

NASDAQ Average

      $55.4     11.1  9.8  11.1  34.1

NASDAQ Median

      $33.6     16.0  13.2  7.2  42.4

(1)

Closing prices based on published financial sources.

Stock price performance is affected by many factors, including, but not limited to: general market and economic conditions; the interest rate environment; the amount of proceeds a company raises in its offering; and numerous factors relating to the specific company, including the experience and ability of management, historical and anticipated operating results, the nature and quality of the company’s assets, and the company’s market area. None of the companies listed in the table above are exactly similar to us. The pricing ratios for their offerings were different from the pricing ratios for our common stock and the market conditions in which these offerings were completed were, in most cases, different from current market conditions. The performance of these stocksbefore receiving your statement will depend on arrangements you may not be indicative of how our stock will perform.make with a brokerage firm.

There can be no assurance that our stock price will not trade below $10.00 per share, as has been the case for many mutual-to-stock conversions. Before you make an investment decision, we urge you to carefully read this prospectus, including, but not limited to, the section entitled “Risk Factors” beginning on page 13.

Steps We May Take If We Do Not Receive Orders for the Minimum Number of Shares

If we do not receive orders for at least 4,250,0003,655,000 shares of common stock, we may take the following steps to issue the minimum number of shares of common stock in the offering range:

 

increase the maximum purchase limitations; and/or

 

extend the offering beyond [, 2011], so long as we resolicit subscriptions that we have previously received in the offering.

extend the offering beyond[            , 2014], so long as we resolicit subscriptions that we have previously received in the offering.

If one or more purchase limitations are increased, subscribers in the subscription offering who ordered the maximum amount, will be given the opportunity to increase their subscription up to the then-applicable limit.

Possible Change in the Offering Range

RP Financial will update its appraisal before we complete the offering. Without further notice to you, the number of shares of common stock to be sold may be increased up to 6,612,5005,686,750 to reflect regulatory considerations, changes in market

and financial conditions, and/or demand for the common stock. If our pro forma market value at that time is either below $42.5$36.6 million or above $66.1$56.9 million, then we may:

 

terminate the offering and promptly return all funds;

 

extend the offering beyond [extension date], so long as we resolicit subscriptions that we have previously received in the offering;

 

set a new offering range; or

 

take such other actions as may be permitted (or not prohibited) by the North Carolina Commissioner of Banks, the Board of Governors of the Federal Reserve System and the Securities and Exchange Commission.

In the event that we extend the offering and conduct a resolicitation, we will notify subscribers of the extension of time and of the rights of subscribers to maintain, change or cancel their stock orders within a specified period. If a subscriber does not respond during the period, his, her or its stock order will be canceled and payment will be returned promptly, with interest calculated at the Bank’s tier 1 statement savings rate, and deposit account withdrawal authorizations will be canceled.

Possible Termination of the Offering

We may terminate the offering at any time and for any reason prior to the special meeting of voting members that is being called to vote upon the conversion, and at any time after member approval, and any required approval of the North Carolina Commissioner of Banks and the Board of Governors of the Federal Reserve System. If we terminate the offering, we will promptly return your funds with interest calculated at the Bank’s tier 1 statement savings rate, and we will cancel deposit account withdrawal authorizations.

How We Intend to Use the Proceeds From the Offering

We intend to invest up to 90%85% of the net proceeds from the offering in the Bank as capital and retain the remainder of the net proceeds from the offering. Therefore, assuming we sell 5,750,000 shares of common stock in the offering, and we have net proceeds of $54.3 million, we intend to invest up to $48.8 million in the Bank and retain the remaining $5.4 million of the net proceeds.for future use.

The following table summarizes how we intend to use the net proceeds from the offering, based on the sale of shares at the minimum, midpoint, maximum and adjusted maximum of the offering range:

 

  Minimum Midpoint Maximum 

Adjusted

Maximum

 
  Minimum
(4,250,000 shares)
 Midpoint
(5,000,000 shares)
 Maximum
(5,750,000 shares)
 Adjusted Maximum
(6,612,500 shares)
   (3,655,000 shares) (4,300,000 shares) (4,945,000 shares) (5,686,750 shares) 
  Amount % of  Net
Proceeds
 Amount % of  Net
Proceeds
 Amount % of  Net
Proceeds
 Amount % of  Net
Proceeds
   Amount % of Net
Proceeds
 Amount % of Net
Proceeds
 Amount % of Net
Proceeds
 Amount % of Net
Proceeds
 
  (Dollars in thousands)   (Dollars in thousands) 

Offering proceeds

  $42,500    $50,000    $57,500    $66,125     $36,550    $43,000    $49,450    $56,867   

Less: offering expenses

   (2,671   (2,952   (3,233   (3,557    (1,473  (1,550  (1,626  (1,714 
                   

 

   

 

   

 

   

 

  

Net offering proceeds

   39,829    100.0  47,048    100  54,267    100.0  62,568    100.0   35,077    100.0  41,450    100.0  47,824    100.0  55,153    100.0

Use of net proceeds:

                  

Proceeds contributed to Macon Bank

  $35,846    90.0 $42,343    90.0 $48,840    90.0 $56,311    90.0  $29,815    85.0 $33,160    80.0 $35,868    75.0 $38,607    70.0

Proceeds remaining for Macon Financial

   3,983    10.0  4,705    10.0  5,427    10.0  6,257    10.0

Proceeds remaining for Entegra

  $5,262    15.0 $8,290    20.0 $11,956    25.0 $16,546    30.0

Subject to receiving any necessary regulatory approvals, we may use the funds we retain for investments,to invest in securities issued by the U.S. Government, U.S. Government agencies and/or U.S. Government sponsored enterprises, mortgage-backed securities and equities, collateralized mortgage obligations and municipal securities; to resume payment of dividends on our trust preferred securities, as well as previously deferred dividends and interest; to pay cash dividends to shareholders; to repurchase shares of our common stockstock; and for other general corporate purposes. Additionally,Initially, we do not intend to pay cash dividends, and, under current federal regulations, subject to limited exceptions, we may not repurchase shares of our common stock during the first year following the conversion. The Bank may use the proceeds it receives from Macon FinancialEntegra to support increased lendingstrengthen its capital position; to fund new loans; to repay borrowings; to invest in securities issued by the U.S. Government, U.S. Government agencies and/or U.S. Government sponsored enterprises, mortgage-backed securities and equities, collateralized mortgage obligations and municipal securities; to expand its banking franchise by establishing or acquiring new branches, or by acquiring other productsfinancial institutions or other financial services companies; and services.for other general corporate purposes.

We do not have any other current plans, intentions or understandings concerning investments, dividends, share repurchases or other specific uses of the funds. Nor do we currently have any plans, agreements or understanding to make any acquisitions or material dispositions.

Please see the section entitled “How We Intend to Use the Proceeds from the Offering” on pagefor more information on the proposed use of the proceeds from the offering.

You May Not Sell or Transfer Your Subscription Rights

You may not sell or transfer your subscription rights. If you order shares of common stock in the subscription offering, you will be required to state that you are purchasing the shares of common stock for yourself and that you have no agreement or understanding to sell or transfer your subscription rights. We will not accept your order if we have reason to believe that you have sold or transferred your subscription rights. When completing your stock order form, you should not add the name(s) of persons who do not have subscription rights or who qualify in a lower subscription offering priority than you do. In addition, the stock order form requires that you list all loans and deposit accounts, giving all names on each loan and account and the account number at the applicable eligibility record date. Your failure to provide this information, or providing incomplete or incorrect information, may result in a loss of part or all of your share allocation.subscription rights.

Purchases by Officers and Directors

We expect our directors and executive officers, together with their associates, to subscribe for 152,000220,000 shares ($1.52.2 million) of common stock in the offering, or 3.5%6.0% of the shares to be sold at the minimum of the offering range. The purchase price paid by our directors and executive officers for their shares will be the same $10.00 per share price paid by all other persons who purchase shares of common stock in the offering.

See “Subscriptions by Directors and Executive Officers” on pagefor more information on the proposed purchases of our shares of common stock by our directors and executive officers.

Benefits to Management and Potential Dilution to Shareholders Following the Conversion

The plan of conversion permitsWe intend to adopt the Bank’s tax-qualified employeefollowing benefit plans (if any)and employment agreements:

Future Stock-based Benefit Plans. We intend to purchase shares of common stock in the subscription offering. However, no employee benefit plans will participate in the offering.

Our current intention is to adoptimplement one or more stock-based benefit plans no earlier than 12six months after completion of the conversion. Shareholder approvalconversion and offering. We will submit these plans to our shareholders for their approval. If we implement the plans within one year after the conversion, the plans must be approved by a majority of the total votes eligible to be cast by our shareholders. If we implement the plans more than one year after the conversion, they must be approved only by a majority of the total votes cast. If we implement the plans within one year after the conversion, we intend to grant stock options in an amount up to 7% of the number of shares sold in the offering and restricted stock awards in an amount equal to 3% of the shares sold in the offering. Stock options will be granted at an exercise price equal to 100% of the fair market value of our common stock on the option grant date. Shares of restricted stock will be awarded at no cost to the recipients. We will incur additional compensation expense as a result of these plans will be required. Sharesplans. See “Pro Forma Data” on page             for suchan illustration of the effects of these plans. The stock-based benefit plans may be issued outaward a greater number of authorized but unissued shares or repurchased shares and/or may be purchased inoptions and restricted stock awards if the open market.plans are adopted after one year from the date of the completion of

the conversion. We have not yet determined when we will present the plans for shareholder approval and we have not yet determined the number of shares that would be reserved for issuance under these plans. The plans will comply with all applicable Federal Reserve regulations.

In additionPotential Dilution And Increased Compensation Costs Related To Stock-based Benefit Plans. The following table summarizes the number of shares of common stock and the aggregate value of grants that are expected to be available under the proposed stock-based benefit plans (assuming the stock-based benefit plans that weare implemented within one year following completion of the conversion). The stock-based benefit plans may adopt,award a greater number of options and restricted stock awards if the plans are adopted more than one year after completion of the conversion.

The table shows the dilution to shareholders if all these shares are issued from authorized but unissued shares, instead of shares purchased in the open market.

Plan

  Minimum
Number of
Shares
   Adjusted
Maximum
Number of
Shares
   As % of
Outstanding
Shares
Issued in the
Conversion(1)
  Dilution
Resulting if
we issue new
Shares for
StockBen.
Plans
  Value of
Grants at
Minimum(2)
   Value of
Grants at
Adjusted
Maximum(2)
 
                 (Dollars in Thousands) 

Restricted Stock Awards

   109,650     170,603     3.0  2.91 $1,097    $1,706  

Stock Option

   255,850     398,073     7.0  6.54  852     1,326  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   365,500     568,676     10.0  9.09 $1,949    $3,032  

(1)The stock-based benefit plans may award a greater number of options and shares, respectively, if the plans are adopted more than 12 months after the completion of the conversion.
(2)The actual value of restricted stock awards will be determined based on their fair value as of the date grants are made. For purposes of this table, fair value is assumed to be the same as the offering price of $10.00 per share. The fair value of stock options has been estimated at $3.33 per option using the Black-Scholes option pricing model with the following assumptions: a grant-date share price and option exercise price of $10.00; dividend yield of 0%; an expected option life of 10 years; a risk-free interest rate of 3.04%; and a volatility rate of 15.82% based on an index of publicly traded thrift institutions. The actual expense of stock options granted under a stock-based benefit plan will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used in the option pricing model ultimately adopted, which may or may not be the Black-Scholes model.

We may fund our plans through open market purchases rather than new issuances of common stock; however, Federal Reserve regulations do not permit us to repurchase our shares during the first year following the conversion, except to fund the grants of restricted stock under the anticipated stock-based benefit plans or, with prior regulatory approval, under extraordinary circumstances.

The actual value of restricted stock awards will be determined based on their fair value (the closing market price of shares of common stock of Entegra) as of the date grants are made. The following table presents the total

value of all shares to be available for awards of restricted stock under the stock-based benefit plan, assuming the shares for the plan are purchased or issued in a range of market prices from $8.00 per share to $14.00 per share at the time of grant.

Share Price

  109,650 Shares
Minimum
  129,000 Shares
Midpoint
  148,350 Shares
Maximum
  170,603 Shares
Adjusted-Maximum
 
   ($000)  ($000)  ($000)  ($000) 
$8.00    877    1,032    1,187    1,365  
$10.00    1,097    1,290    1,484    1,706  
$12.00    1,316    1,548    1,780    2,047  
$14.00    1,535    1,806    2,077    2,388  

The grant-date fair value of the stock options granted under the stock-based benefit plans will be based, in part, on the closing price of shares of common stock of Entegra on the date the options are granted. The fair value will also depend on the various assumptions utilized in the option-pricing model ultimately adopted. The following table presents the total estimated value of the stock options to be available for grant under the stock-based benefit plans, assuming the range of market prices for the shares are $8.00 per share to $14.00 per share at the time of the grant.

Exercise Price

  Grant Date Fair
Value Per Option
  255,850 Options
Minimum
  301,000 Options
Midpoint
  346,150 Options
Maximum
  398,073 Options
Adjusted-Maximum
 
      ($000)  ($000)  ($000)  ($000) 
$8.00   $2.66    681    801    921    1,059  
$10.00   $3.33    852    1,002    1,153    1,326  
$12.00   $4.00    1,023    1,204    1,385    1,592  
$14.00   $4.66    1,192    1,403    1,613    1,855  

Employment Agreements; Severance and Non-Competition Agreements. Upon completion of the conversion, we intend to enter into employment and change of control agreements with Roger D. Plemens, our President and Chief Executive Officer, Ryan M. Scaggs, our Chief Operating Officer, and David A. Bright, our Chief Financial Officer; and severance and non-competition agreements with certain ofCarolyn H. Huscusson, our executiveChief Retail Officer, Bobby D. Sanders, II, our Chief Credit Administration Officer, Laura W. Clark, our Chief Risk Officer, and other officers.Marcia J. Ringle our Corporate Secretary. See “–“Our Business – Executive Officer Compensation” and “–“Our Business – Benefits to be Considered Following Completion of the Conversion” on pagefor a further discussion of these agreements, including their terms and potential costs, as well as a description of other benefits arrangements. In addition, for further information with respect to the expenses related to the stock-based benefit plans, see “Risk Factors – The implementation of stock-based benefit plans may dilute your ownership interest and increase our costs, which will reduce our income,” on pageand “–“Our Business – Benefits to be Considered Following Completion of the Conversion” on page.

Market for Common Stock

We expect that our common stock will be listed for trading on the NASDAQ Global Market under the symbol .“ENFC.Raymond JamesAfter shares of our common stock begin trading, you may contact a stock broker to buy or sell shares. There can be no assurance that persons purchasing our common stock in the offering will be able to sell their shares at or above the $10.00 offering price, and brokerage firms typically charge commissions related to the purchase or sale of securities. Sandler O’Neill & Associates, Inc.Partners, L.P. currently intends to make a market in the shares of our common stock, but is under no obligation to do so. See “– Market“Market for the Common Stock” on page.

Our Policy Regarding Dividends

Following completion of the offering, our Board of Directors will have the authority to declare dividends on our common stock, subject to statutory and regulatory requirements. Under the Bancorp MOU,terms of the written agreement, we may not declare or pay any dividends without the prior approval of the Federal Reserve Bank of Richmond. Initially, we do not intend to pay any cash dividends following the offering. The payment and amount of any future dividend payments will depend upon a number of factors.

For further information, see “Our Policy Regarding Dividends” on page.

Tax Consequences

As a general matter, the conversion will not be a taxable transaction for federal or state income tax purposes to Macon Financial,Entegra, Bancorp, the Bank, or persons eligible to subscribe in the subscription offering. See “–“The Conversion – Material Income Tax Consequences” on pagefor additional information.

Conditions to Completion of the Conversion and the Offering

We cannot complete the conversion and the offering unless:

 

  

the plan of conversion is approved by at leasta majority of votes eligibleto be cast by Bancorp’s voting members. A special meeting of voting members to consider and vote upon the plan of conversion has been set for[, 2011]2014];

 

we have received and accepted orders to purchase at least the minimum number of shares of common stock offered; and

 

we receive all requisite regulatory approvals to complete the conversion and the offering, including approvals from the North Carolina Commissioner of Banks and the Board of Governors of the Federal Reserve System.

Emerging Growth Company Status

The Jumpstart Our Business Startups Act, or JOBS Act, which was signed into law on April 5, 2012, has made numerous changes to the federal securities laws to facilitate access to capital markets. Under the JOBS Act, a company with total annual gross revenues of less than $1.0 billion during its most recently completed fiscal year qualifies as an “emerging growth company.” We qualify as an “emerging growth company” and believe that we will continue to qualify as an “emerging growth company” for five years from the completion of the stock offering.

As an “emerging growth company,” we have elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards. As of December 31, 2013, there is not a significant difference in the presentation of our financial statements as compared to other public companies as a result of this transition guidance.

Additionally, we are in the process of evaluating the benefits of relying on the reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, if, as an “emerging growth company” we choose to rely on such exemptions, we may not be required to, among other things, (i) provide an auditor’s attestation report on our system of internal control over financial reporting, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) hold non-binding shareholder votes regarding annual executive compensation or executive compensation payable in connection with a merger or similar corporate transaction, (iv) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis), and (v) disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation. However, we will also not be subject to the auditor attestation requirement or additional executive compensation disclosures so long as we remain a “smaller reporting company” under Securities and Exchange Commission regulations (generally less than $75 million of voting and non-voting equity held by non-affiliates).

We could remain an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1.0 billion, (ii) the date that we become a “large accelerated filer” as defined inRule 12b-2 under the Securities Exchange Act of 1934, as amended, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1.0 billion in non-convertible debt during the preceding three-year period.

How You Can Obtain Additional Information

Our branch office personnel may not assist with investment-related questions about the offering. If you have any questions regarding the conversion or the offering, please call our Stock Information Center, toll free, at (    )     -     , Monday through Friday between 10:00 a.m. and 4:00 p.m., Eastern Daylight Time. The Stock Information Center will be closed on weekends and bank holidays.

TO ENSURE THAT EACH PERSON RECEIVES A PROSPECTUS AT LEAST 48 HOURS PRIOR TO THE EXPIRATION DATE OF [, 2011]2014], NO PROSPECTUS WILL BE MAILED OR HAND-DELIVERED ANY LATER THAN FIVE DAYS OR TWO DAYS, RESPECTIVELY, PRIOR TO [, 2011]2014].

RISK FACTORS

You should consider carefully the following risk factors in evaluating an investment in our shares of common stock.

Risks Related to Our Business

The Bank is subject to the Bank MOUa Consent Order and Bancorp is subject to the Bancorp MOU (together, the “Memoranda”)a Written Agreement, which require elevated capital ratios and other actions; failure to comply with the terms of the MemorandaRegulatory Agreements may result in adverse consequences.In accordance with the terms of2012, the Bank MOU,entered into a Stipulation to the Bank has agreed to, among other things, (1) increase regulatory capital to achieve and maintainIssuance of a Tier I Leverage Capital ratio of not less than 8% and a Total Risk-Based Capital ratio of not less than 12%, (2) develop specific plans and proposals for the reduction and improvement of lines of credit which are subject to adverse classification, (3) review its overall liquidity objectives and develop plans and procedures aimed at reducing reliance on volatile liabilities to fund longer term assets, (4) establish and maintain an adequate allowance for loan losses, and (5) approve an enhanced loan loss reserve policy to incorporate recommendations ofConsent Order with the Federal Deposit Insurance Corporation (“FDIC”) and the North Carolina Commissioner of Banks (“Commissioner,” and together with the FDIC, the “Bank Supervisory Authorities”) agreeing to the issuance of a consent order (the “Consent Order”). Also in 2012, Bancorp entered into a written agreement (the “Written Agreement”) with the Federal Reserve Bank of Richmond (“FRB”).

In accordance with the terms of the Consent Order, the Bank has agreed to, among other things, (i) submit a written capital plan, (ii) reduce classified assets, (iii) reduce lines of credit subject to adverse classification, (iv) maintain a tier 1 leverage capital ratio of not less than 8.0%, and a total risk-based capital ratio of not less than 11.0%, (v) reduce concentrations of credit, (vi) establish and maintain a fully funded allowance for loan losses, and (vii) not accept, renew, or rollover any brokered deposits, without the prior regulatory approval. In addition, the Bank must obtain regulatory approval prior to paying any dividends to Bancorp. The Bank MOUConsent Order will remain in effect until modified, terminated, lifted, suspended or set aside by the Bank Supervisory Authorities.

Under the Bancorp MOU,Written Agreement, Bancorp has agreed to, among other things, (1)(i) not declare or pay any dividends, including payments on its trust preferred securities, without the prior approval of the Federal Reserve Bank of Richmond (“FRB”), (2)FRB, (ii) not directly or indirectly take dividends or any other form of payments representing a reduction in capital from the Bank without the prior written approval of the FRB, (3)(iii) not, directly or indirectly, incur, increase, or guarantee any debt without the prior written approval of the FRB, (4)(iv) preserve ourits cash assets and not dissipate those assets except for the benefit of the Bank, and (5)(v) take appropriate steps to ensure that the Bank complies with any order, or other supervisory action entered into with the Bank’s federal and state regulators. The Bancorp MOUWritten Agreement will remain in effect until modified, terminated, lifted, suspended or set aside by the FRB.

Bancorp and the Bank have taken and continue to take prompt and aggressive action to respond to the issues raised in the Memoranda.Consent Order and the Written Agreement (together, the “Regulatory Agreements”). A material failure to comply with the terms of the MemorandaRegulatory Agreements could subject Bancorp or the Bank to additional regulatory actions, including a consent order or other action, and further regulation, which may have a material adverse effect on our future business, results of operations, financial condition and financial condition.the value of our common stock. For additional information regarding the Memoranda,Regulatory Agreements, see “– Memoranda of Understanding”“Supervision and Regulation – Regulatory Agreements” on page.

We must raise sufficient capital to comply with the elevated capital requirements of the Bank MOU.Consent Order. The resulting capital cushion may not be sufficient to absorb additional loan losses and maintain such compliance.As part of the Bank MOU,Consent Order, the Bank Supervisory Authorities require the Bank to maintain a Tier I Leverage Capitaltier 1 leverage capital ratio of not less than 8%8.0% and a Total Risk-Based Capitaltotal risk-based capital ratio of not less than 12%11.0%. At MarchDecember 31, 2011,2013, the Bank had a Tier I Leverage Capitaltier 1 leverage capital ratio of 7.07%7.02%, and a Total Risk-Based Capitaltotal risk-based capital ratio of 11.55%11.97%. Even though we expect the Bank to exceed these higher capital requirements after the offering, its capital cushion may not be sufficient to cover future losses. At the minimum offering, the Bank’s pro forma Total Risk-Based Capitaltotal risk-based capital ratio is expected to be 16.61% with17.38%, reflecting a capital cushion of $31.9$33.0 million in excess of the required capital level. Any increased provision expenses to fund its allowance for loan losses and increased real estate liquidation expenses will negatively impact the Bank’s capital cushion. If the Bank’s capital cushion is impacted such that its capital ratios do not comply with the requirements of the Bank MOU,Consent Order, the Bank Supervisory Authorities could take additional enforcement action against the Bank, including the imposition of monetary penalties, as well as further operating restrictions.

We initially will not pay dividends or repurchase our common stock after the offering.Under the Bancorp MOU, we may not declare or pay any dividends without the prior approval of the FRB. Following the conversion and offering, we initially will not pay dividends on our common stock and will not repurchase our common stock, which may negatively impact our stock price. For further information, see “Our Policy Regarding Dividends” on page.

We recorded losses in the last three months and last two full fiscal years and losses may continue in the future, which may negatively impact our stock price. During the three months ended March 31, 2011, and the years ended December 31, 2010 and 2009, we recorded net losses of $8.9 million, $14.3 million and $7.8 million, respectively. These losses were primarily due to provisions for loan losses of $9.8 million, $18.9 million and $21.9 million, respectively. Another contributing factor has been our high levels of non-performing assets, for which we do not record interest income. These assets totaled $96.7 million at March 31, 2011; $97.1 million at December 31, 2010; and $66.5 million at December 31, 2009. Our ability to return to profitability will depend, in part, on reducing the amount of our provision for loan losses and other expenses, and reducing our level of non-performing assets. Continued losses may negatively impact our stock price.

We may not be requiredable to increase the valuation allowance againstutilize all of our deferred tax assets.asset.As of MarchDecember 31, 2011,2013, we had neta gross deferred tax assetsasset of $17.4 million before a valuation allowance. During 2010, we reached a three-year pre-tax cumulative loss position. Under accounting principles generally accepted in the United States (“GAAP”), a cumulative loss position is considered significant evidence which makes it very difficult for us to rely on future earnings as a reliable source of future taxable income to realize deferred tax assets. Accordingly, we$26.8 million. We have established a valuation allowance againstfor our net deferred tax assets as of March 31, 2011, totaling $11.8 million because we believe that it is not likely that all of these assets will be realized. This valuation allowance resulted in an unreservedasset to reduce its net carrying value to $4.2 million. Our ability to use our deferred tax asset, of $5.6 million at March 31, 2011. In determiningincluding the amountreversal or partial release of the valuation allowance, we consideredis dependent on our ability to generate future earnings within the reversaloperating loss carry-forward periods, which are generally 20 years. Some or all of our deferred tax liabilities, and the abilityasset could expire unused if we are unable to carry back losses to prior years. This process required significant judgment by management about matters that are by nature uncertain. It is likely we will need to increase our valuation allowancegenerate taxable income in the coming quarters asfuture sufficient to utilize the deferred tax asset, or we work through someenter into transactions that limit our right to use it. If a material portion of our problem assets, whichdeferred tax asset expires unused, it could have a material adverse effect on our future business, results of operations, financial condition and financial condition.the value of our common stock. Our ability to realize the deferred tax asset is periodically reviewed and the valuation allowance is adjusted accordingly.

Our estimate for losses in our loan portfolio may be inadequate, which would cause our results of operations and financial condition to be adversely affected.We maintain an allowance for loan losses, which is a reserve established through a provision for possible loan losses charged to our expenses and represents management’s best estimate of probable losses within our existing portfolio of loans. Our allowance for loan losses amounted to $20.9 million at March 31, 2011, as compared to $17.2$14.3 million at December 31, 2010.2013, as compared to $14.9 million at December 31, 2012. The level of the allowance reflects management’s estimates and judgments as to specific credit risks, evaluation of industry concentrations, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio, which have been increasing in light of recent economic conditions. The determination of the appropriate level of the allowance for loan

losses inherently involves a high degree of subjectivity and requires management to make significant estimates of current credit risks and future trends, all of which may undergo material changes. An independent third party recently reviewed a significant portion of our loans, completing its review in January of 2011. Based on its estimates using the highest range of potential losses, our expense relating to the additional provision for loan losses could be increased substantially. In addition, we anticipate that bank regulatory agencies will review our allowance for loan losses during our next examination, and may require an increase in the provision for possible loan losses or the recognition of further loan charge-offs. Finally, the

appointment of a new Chief Credit Officer in February of 2011 may result in changes to our loan loss methodology and increases in our provisions for loan losses. Any such increases may have a material adverse effect on our future business, results of operations, financial condition and the value of our common stock.

Our construction and land development, commercial real estate and home equity and line ofloans generally carry greater credit lending may expose usrisk than one- to a greater risk of loss and hurt our earnings and profitability.four-family residential mortgage loans.Historically, our business strategy has centered, in part, on offering construction and land development,At December 31, 2013, we had commercial and home equity and line of credit loans secured by real estate in order to expand our net interest margin.loans of $155.6 million, or 29.7% of total loans. These types of loans generally have higher risk-adjusted returns and shorter maturities than traditional one- to four-family residential mortgage loans. At March 31, 2011, construction and landAlso, many of our borrowers have more than one of these types of loans outstanding. Consequently, an adverse development commercial, and home equity loans and lineswith respect to one loan or one credit relationship can expose us to a significantly greater risk of credit secured by real estate totaled $430.5 million, which represented 62.3% of total loans. Such loans increase our credit risk profile relativeloss compared to other financial institutions that have higher concentrations ofan adverse development with respect to a one- to four-family loans.

Loansresidential mortgage loan. Further, loans secured by commercial or land development real estate properties are generally for larger amounts and involve a greater degree of risk than one- to four-family residential mortgage loans. Payments on loans secured by these properties generally are often dependent on the income produced by the underlying properties which, in turn, depends on the successful operation and management of the properties. Accordingly, repayment of these loans is subject to adverse conditions in the real estate market or the local economy. If loans that are collateralized by commercial real estate become troubled and the value of the collateral has been significantly impaired, then we may not be able to recover the full contractual amount of principal and interest that we anticipated at the time we originated the loan, which could cause us to increase our provision for loan losses which would in turn adversely affect our operating results and financial condition. While we seek to minimize these risks in a variety of ways, there can be no assurance that these measures will protect against credit-related losses.

Our significant concentration of construction financing may expose us to a greater risk of loss and hurt our earnings and profitability. At December 31, 2013, we had other construction and land loans of $64.9 million, or 12.4 % of total loans and one-to four-family residential construction loans of $9.0 million or 1.7% of total loans outstanding to finance construction and land development. These loans are dependent on the successful completion of the projects they finance, however, in recent years many construction and development projects in our primary market area have not been completed in a timely manner, if at all.

Construction financing typically involves a higher degree of credit risk than financing on improved, owner-occupied real estate. Risk of loss on a construction loan is largely dependent upon the accuracy of the initial estimate of the property’s value at completion of construction and the bid price and estimated cost (including interest) of construction. If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of the value proves to be inaccurate, we may be confronted, at or prior to the maturity of the loan, with a project whose value is insufficient to assure full repayment. When lending to builders, the cost of construction breakdown is provided by the builder, as well as supported by the appraisal. Although our underwriting criteria are designed to evaluate and minimize the risks of each construction loan, there can be no guarantee that these practices will safeguard against material delinquencies and losses to our operations.

At March 31, 2011, we had

Repayment of our commercial business loans of $154.8 million, or 22.4% of total loans, outstanding to finance construction and land development. Construction and land development loans areis primarily dependent on the successful completioncash flows of the projects they finance, however,borrower, which may be unpredictable, and the collateral securing these loans may fluctuate in many cases such constructionvalue. We offer different types of commercial loans to a variety of small- to medium-sized businesses, and development projectsintend to increase our commercial business loan portfolio in the future. The types of commercial loans offered are business lines of credit and term equipment financing. Our commercial business loans are primarily underwritten based on the cash flow of the borrowers and secondarily on the underlying collateral, including real estate. The borrowers’ cash flow may be unpredictable, and collateral securing these loans may fluctuate in value. Some of our primary market areacommercial business loans are not being completedcollateralized by equipment, inventory, accounts receivable or other business assets, and the liquidation of collateral in a timely manner, if at all.the event of default is often an insufficient source of repayment because accounts receivable may be uncollectible and inventories may be obsolete or of limited use. As of December 31, 2013, our commercial business loans totaled $8.3 million, or 1.6% of our total loan portfolio.

Our high level of home equity loans and line of credit lending may expose us to increased credit risk.At December 31, 2013, we had home equity loans and lines of credit of $56.8 million, or 10.9% of total loans. Home equity loans and lines of credit typically involve a greater degree of risk than one- to four-family residential mortgage loans. Equity line lending allows customer to access an amount up to his, her or its line of credit limit for the term specified in their agreement. At the expiration of the term of an equity line, a customer may have the entire principal balance outstanding as opposed to a one- to four-family residential mortgage loan where the principal is disbursed entirely at closing and amortizes throughout the term of the loan. We cannot predict when and to what extent our customers will access their equity lines. While we seek to minimize this risk in a variety of ways, including attempting to employ conservative underwriting criteria, there can be no assurance that these measures will protect against credit-related losses.

Repayment of our commercial business loans is primarily dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may fluctuate in value.We offer different types of commercial loans to a variety of small to medium-sized businesses, and intend to increase our commercial business loan portfolio in the future. The types of commercial loans offered are business lines of credit and term equipment financing. Our commercial business loans are primarily underwritten based on the cash flow of the borrowers and secondarily on the underlying collateral, including real estate. The borrowers’ cash flow may be unpredictable, and collateral securing these loans may fluctuate in value. Some of our commercial business loans are collateralized by equipment, inventory, accounts receivable or other business assets, and the liquidation of collateral in the event of default is often an insufficient source of repayment because accounts receivable may be uncollectible and inventories may be obsolete or of limited use.

As of March 31, 2011, our commercial business loans totaled $15.1 million, or 2.2% of our total loan portfolio. Non-accruing commercial business loans totaled $0.9 million and $1.1 million as of March 31, 2011 and December 31, 2010, respectively.

Our lending on vacant land may expose us to a greater risk of loss and may have an adverse effect on results of operations.A portion of our residential and commercial lending is secured by vacant or unimproved land. Loans secured by

vacant or unimproved land are generally more risky than loans secured by improved property for one- to four-family residential mortgage loans. Since vacant or unimproved land is generally held by the borrower for investment purposes or future use, payments on loans secured by vacant or unimproved land will typically rank lower in priority to the borrower than a loan the borrower may have on their primary residence or business. At March 31, 2011, loans secured by vacant or unimproved property totaled $44.4 million, or 6.4% of our loan portfolio. These loans are susceptible to adverse conditions in the real estate market and local economy.

We continue to hold and acquire a significant amount of other real estate, which has led to increased operating expenses and vulnerability to additional declines in real property values.We foreclose on and take title to real estate serving as collateral for many of our loans as part of our business. Real estate owned by us and not used in the ordinary course of our operations is referred to as “real estate owned” or “REO.” At MarchDecember 31, 2011,2013, we had REO with an aggregate book value of $23.5$10.5 million, and real estate held for investment of $2.5 million compared to $21.5$19.8 million and $0.0 million at December 31, 2010.2012, respectively. We obtain appraisals prior to taking title to real estate and periodically thereafter. However, due toin the continuedevent of a deterioration in real estate prices in our market areas, there can be no assurance that such valuations will reflect the amount which may be paid by a willing purchaser in an arms-length transaction at the time of the final sale. Moreover, we cannot assure investors that the losses associated with REO will not exceed the estimated amounts, which would adversely affect future results of our operations.

The calculation for the adequacy of write-downs of our REO is based on several factors, including the appraised value of the real property, economic conditions in the property’s sub-market, comparable sales, current buyer demand, availability of financing, entitlement and development obligations and costs and historic loss experience. All of these factors have caused furthersignificant write-downs in recent periodsyears and can change without notice based on market and economic conditions. HighElevated levels of non-performing assets indicate that REO balances will continue to be highsignificant for the foreseeable future. IncreasedHigher REO balances have led to greater expenses as we incur costs to manage and dispose of the properties. We expect that our earnings will continue to be negatively affected by various expenses associated with REO, 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 REO. Moreover, our ability to sell REO is affected by public perception that banks are inclined to accept large discounts from market value in order to quickly liquidate properties. Any furthermaterial decrease in market prices may lead to further REO write-downs, with a corresponding expense in our statement of operations. Further write-downs on REO or an inability to sell REO properties could have a material adverse effect on our future business, results of operations, financial condition and financial conditions.the value of our common stock. Furthermore, the management and resolution of non-performing assets, which include REO, increases our costs and requires significant commitments of time from our management and directors, which can be detrimental to the performance of their other responsibilities. The expenses associated with REO and any further property write-downs could have a material adverse effect on our future business, results of operations, financial condition and resultsthe value of operations.our common stock.

A significant portion of our loan portfolio is secured by real estate, and events that negatively impact the real estate market could hurt our business.A significant portion of our loan portfolio is secured by real estate. As of MarchDecember 31, 2011,2013, approximately 97%97.7% of our loans had real estate as a primary or secondary component of collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. A continued weakening of the real estate market in our market areas could continue to result in an increase in the number of borrowers who default on their loans and a reduction in the value of the collateral securing their loans, which in turn could have an adverse effect on our profitability and asset quality. If we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, our earningsresults of operations, financial condition and shareholders’ equitythe value of our common stock could be adversely affected. The declines in home prices in the markets we serve, along with the reduced availability of mortgage credit, also may result in increases in delinquencies and losses in our portfolio of loans related to residential real estate construction and development. Further declines in home prices coupled with a deepened economic recession and continued rises in unemployment levels could drive losses beyond that which is provided for in our allowance for loan losses. In that event, our earnings could be adversely affected.

Additionally, recent weakness in the secondary market for residential lending could have an adverse impact on our profitability. Significant ongoing disruptions in the secondary market for residential mortgage loans have limited the market for and liquidity of most mortgage loans other than conforming Fannie Mae and Freddie Mac loans. The effects of ongoing mortgage market challenges, combined with the ongoing correction in residential real estate market prices and reduced levels of home sales, could result in further price reductions in single family home values, adversely affecting the value of collateral securing mortgage loans held, mortgage loan originations and gains on sale of mortgage loans. Continued 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 our borrowers that result in higher delinquencies and greater charge-offs in future periods, which could adversely affect our financial condition or results of operations.

Continued and sustained deterioration in the housing sector and related markets and prolonged elevated unemployment levels may adversely affect our business and financial results. During 2009 and much of 2010, general economic conditions continued to worsen nationally as well as in our market areas. Our lending business is tied, in large part, to the real estate market. Declines in home prices and increases in foreclosures and unemployment have adversely impacted the credit performance of real estate related loans, resulting in the write-down of asset values. The continuing housing slump has resulted in reduced demand for the construction of new housing, further declines in home prices, and increased delinquencies on construction, residential and commercial mortgage loans. The ongoing concern about the stability of the financial markets in general has caused many lenders to reduce or cease providing funding to borrowers. These conditions may also cause a further reduction in loan demand, and increases in our non-performing assets, net charge-offs and provisions for loan losses. A worsening of these negative economic conditions could adversely impact our prospects for growth and asset valuations and could result in a decrease in our interest income and a material increase in our provision for loan losses.

Concentration of collateral in our primary market area which has recently experienced declines in valuations, may increase the risk of increased non-performing assets. Our primary market area consists of the Westernwestern North Carolina counties of Cherokee, Henderson, Jackson, Macon, Polk and Transylvania. At MarchDecember 31, 2011,2013, approximately $506.8$426.7 million, or 73.4%81.5%, of our loans were secured by real estate located within this area. Declines in the valuations of real estate within our primary market area have adversely impacted the credit performance of real estate related loans, resulting in the write-down of asset values and an increase in non-performing assets. According to the multiple listing service (MLS) data available for the Franklin, North Carolina area, the median sales price for existing single family homes in this area decreased from $182,071 in 2007 to $135,224 in 2010. We believe that this change in median sales prices is indicative of changes throughout our primary market area. By contrast, the median sales price for existing homes in the U.S. decreased from $217,900 in 2007 to $173,100 in 2010. A continued decline in real estate values in our primary market area would lower the value of the collateral securing loans on properties in this area, and may increase our level of non-performing assets.

High loan-to-value ratiosIncome from secondary mortgage market operations is volatile, and we may incur losses with respect to our secondary mortgage market operations that could negatively affect our earnings.A key component of our existing business is to sell in the secondary market longer term, conforming fixed-rate residential mortgage loans that we originate, earning non-interest income in the form of gains on sale. When interest rates rise, the demand for mortgage loans tends to fall and may reduce the number of loans we can originate for sale. Weak or deteriorating economic conditions also tend to reduce loan demand. Although we originate, and intend to continue originating, loans on a significant portion of our other construction“best efforts” basis, and landwe sell, and residential construction loan portfolio exposeintend to continue selling, most loans in the secondary market with limited or no recourse, we are required, and will continue to be required, to give customary representations and warranties to the buyers relating to compliance with applicable law. If we breach those representations and warranties, the buyers will be able to require us to greater risk of loss. Many of our loans have high loan-to-value ratios,i.e. 85% and above for residential construction loans, 75% and above for land development and lotrepurchase the loans and commercial land loans, and 65%and above for undeveloped land loans. At March 31, 2011, approximately $28.0 million, or 18% ofwe may incur a loss on the repurchase that could negatively affect our other construction and land and residential construction loans had high loan-to-value ratios, and we had commitments to extend an additional $0.5 million related to these loans. Because real estate values have declined in our market areas, many of our loans that once were below the regulatory thresholds now exceed these loan-to-value thresholds. Loans with high loan-to-value ratios are more sensitive to declining property values than those with lower loan-to-value ratios and, therefore, experience a higher incidence of default and severity of losses. In addition, if our borrowers sell the properties, they may be unable to repay their loans in full from the proceeds of the sales. Furthermore, most of our acquisition, development and construction loans have adjustable interest rates. As a result, these loans may experience a higher rate of default in a rising interest rate environment due to the loans repricing upward as market rates rise. For these reasons, these loans may experience higher rates of delinquencies, defaults and losses.earnings.

Future changes in interest rates could reduce our profits. Our ability to make a profit largely depends on our net interest income, which could be negatively affected by changes in interest rates. Net interest income is the difference between:

 

the interest income we earn on our interest-earning assets, such as loans and securities; and

 

the interest expense we pay on our interest-bearing liabilities, such as deposits and borrowings.

Timing differences that can result from our interest-earning assets not repricing at the same time as our interest-bearing liabilities can negatively impact our net interest income. In addition, the amount of change in interest-earning assets and interest-bearing liabilities can also vary and present a risk to the amount of net interest margin earned. We generally employ market indexes when making portfolio loans in order to reduce the interest rate risk in our loan portfolio. Those indexes may not move in tandem with changes in rates of our funding sources, depending on market demand. As part of our achieving a balanced earning asset portfolio and earning acceptable yields, we also invest in longer term fixed rate municipal securities and in securities which have issuer callable features. These securities could reduce our net interest income or lengthen the average life during periods of high interest rate volatility. We also employ forecasting models to measure and manage the risk within stated policy guidelines. Notwithstanding these tools and practices, we are not assured that we can reprice our assets commensurately to interest rate changes in our funding sources, particularly during periods of high interest rate volatility. The difference in the timing of repricing our assets and liabilities may result in a decline in our earnings.

As we take steps to implement our operating strategy, ourOur total loan balance may decline, which may negatively impact our net interest income. At MarchDecember 31, 2011,2013, our non-owner occupied commercial real estate and other construction and real estate loans totaled $253.0$138.3 million, or 35%26.4%, of our total loan portfolio. Since mid-2007, we have sought to reduce our concentration in this and otherthese higher risk loan categories. In the future, we intend to increase our focus on smallsmall- to medium-sized business and private banking customers. As we seek to change the mix of our loan portfolio and reduce our higher risk loan concentrations, it is possible that our total loan balance may decline, which in turn may negatively impact interest income.

Strong competition within our market areas may limit our growth and profitability.Competition in the banking and financial services industry is intense. In our market areas, we compete with credit unions, commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Some of our competitors have greater name recognition and market presence that benefit them in attracting business, and offer certain services that we do not or cannot provide. In addition, larger competitors may be able to price loans and deposits more aggressively than we do, which could affect our ability to grow and remain profitable on a long-term basis. Our profitability depends upon our continued ability to successfully compete in our market areas. If we must raise interest rates paid on deposits or lower interest rates charged on our loans, our net interest margin and profitability could be adversely affected. For additional information see “– Competition”“Our Business – General” on page.

The financial services industry could become even more competitive as a result of continuing technological changes and increasing consolidation. Technology has lowered barriers to entry and made it possible for non-banksnon-

banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of our competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than we can.

We are subject to extensive regulation and oversight, and, depending upon the findings and determinations of our regulatory authorities, we may be required to make adjustments to our business, operations or financial position and could become subject to formal or informal regulatory action.We are subject to extensive regulation and supervision, including examination by federal and state banking regulators. Federal and state regulators have the ability to impose substantial sanctions, restrictions and requirements on us if they determine, upon conclusion of their examination or otherwise, violations of laws with which we must comply or weaknesses or failures with respect to general standards of safety and soundness, including, for example, in respect of any financial concerns that the regulators may identify and desire for us to address. Such enforcement may be formal or informal and can include directors’ resolutions, memoranda of understanding, consent orders, civil money penalties and termination of deposit insurance and bank closure. Enforcement actions may be taken regardless of the capital levels of the institutions, and regardless of prior examination findings. In particular, institutions that are not sufficiently capitalized in accordance with regulatory standards may also face capital directives or prompt corrective actions. Enforcement actions may require certain corrective steps (including staff additions or changes), impose limits on activities (such as lending, deposit taking, acquisitions, paying dividends or branching), prescribe lending parameters (such as loan types, volumes and terms) and require additional capital to be raised, any of which could adversely affect our financial condition and results of operations. The imposition of regulatory sanctions, including monetary penalties, may have a material impact on our financial condition and results of operations and/or damage our reputation. In addition, compliance with any such action could distract management’s attention from our operations, cause us to incur significant expenses, restrict us from engaging in potentially profitable activities and limit our ability to raise capital. See “– Memoranda of Understanding”“Supervision and Regulation – Regulatory Agreements” on page.

Financial reform legislation enacted by Congress in 2010 isand resulting regulations have increased, and are expected to continue to increase our costs of operations.In 2010, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). This new law has significantly changeschanged the currentstructure of the bank regulatory structuresystem and affects the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. 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. Although some of these regulations have been promulgated, or issued for comment in recent months, many of these requiredadditional regulations are still being drafted.expected to be issued in 2014 and thereafter. Consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.

Certain provisions of the Dodd-Frank Act will have a near-term effect on us. For example, the federal prohibitions on paying interest on demand deposits will be eliminated on July 21, 2011, thus allowing businesses to have interest-bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse effect

on our interest expense and could adversely impact our ability to compete with larger financial institutions that have more diverse sources of revenues which may allow them to offer higher interest rates on certain types of demand deposit accounts.

The Dodd-Frank Act permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2008, and noninterest bearing transaction accounts have unlimited deposit insurance through December 31, 2012. This increase will result in a larger amount of insured deposits, thereby possibly increasing the amounts of deposit insurance assessments imposed by the FDIC. The Dodd-Frank Act also broadened the base for insurance fund assessments by calculating the assessment owed by an institution in relation to its average consolidated total assets less its tangible equity capital. It also required that institutions having more than $10 billion in assets bear a disproportionate share of the assessments necessary to raise the FDIC’s reserve ratio to 1.35% of insured deposits by 2020. Although the broadening of the assessment base and the placing of a disproportionate share upon larger institutions have had a positive impact upon the deposit insurance expense of the Bank and other community financial institutions, there can be no assurance that a variety of factors, including the increase in insured deposits covered by FDIC deposit insurance, a continued high incidence of bank failures, and possible increases in the FDIC reserve ratio beyond 1.35%, will not cause the Bank’s deposit insurance expense to increase significantly in the future.

The Dodd-Frank Act requires publicly traded companies to provide shareholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and authorizes the Securities and Exchange Commission (“SEC”) to promulgate rules that would allow shareholders to nominate their own candidates using a company’s proxy materials. The legislation also directs the Board of Governors of the Federal Reserve System (the “Federal Reserve”) to promulgate rules prohibiting excessive compensation paid to executives of banks and bank holding companies having more than $1.0 billion in assets, regardless of whether the company is publicly traded or not.

The Dodd-Frank Act creates acreated new Consumer Financial Protection Bureau (the “Bureau”) with broad powers to supervise and enforce consumer protection laws. The Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The BureauIt also has examination and enforcement authority

over all banks and savings institutions with more than $10 billion in assets. Smaller banksBanks and savings institutions with $10 billion or less in assets will be examined by their applicable bank regulators. The Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national banks and federal savings associations, and gives state attorneys general the ability to enforce federal consumer protection laws.

It is expected that the Dodd-Frank Act and the regulations it requires could increase the interest and operating expenses of the Bank and comparable financial institutions. It is also expected that a number of the provisions ofdifficult to quantify what specific impact the Dodd-Frank Act and related regulations couldhave had on the Bank to date and what impact yet to be written regulations will have on us in the future. However, it is expected that at a minimum these measures will increase our costs of doing business and increase our costs related to regulatory compliance, and may have a significant adverse effect on our lending activities, financial performance and operating flexibility.

We will become subject to more stringent capital requirements, which may adversely impact our return on equity, require us to raise additional capital, or constrain us from paying dividends or repurchasing shares.In July 2013, the mortgage loanBoard of Governors of the Federal Reserve System (the “Federal Reserve”) and small business loan activities ofthe FDIC approved new rules that will substantially amend the regulatory risk-based capital rules applicable to the Bank. The final rule implements the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act.

The final rule includes new minimum risk-based capital and leverage ratios, which will be effective for the Bank and other community financial institutions.Entegra on January 1, 2015, and revises the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital requirements will be: (i) a new common equity tier 1 capital ratio of 4.5%; (ii) a tier 1 to risk-based assets capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a tier 1 leverage ratio of 4%. These include restricting the methods by which the compensationrules also establish a “capital conservation buffer” of mortgage originators may be calculated; creating potential defenses to foreclose upon defaulted home mortgage loans not meeting characteristics established by federal banking regulators; limiting the ability of community financial institutions to originate2.5%, and sell certain types of home mortgages to securitizers of mortgage-backed securities; and requiring the collection and reporting of substantial data and certain types of small business loan applications. Although neither the possible increasewill result in the Bank’s interestfollowing minimum ratios: (i) a common equity tier 1 capital ratio of 7.0%, (ii) a tier 1 to risk-based assets capital ratio of 8.5%, and operating expenses, nor(iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such actions.

The application of more stringent capital requirements for the Bank could, among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory actions constraining us from paying dividends or repurchasing shares if we were to be unable to comply with such requirements.

We initially will not pay dividends or repurchase our common stock after the offering.Under the Written Agreement, we may not declare or pay any onedividends or morerepurchase our common stock, without the prior approval of the other aspectsFRB. Following the conversion and offering, we initially will not pay dividends on our common stock and will not repurchase our common stock, which may negatively impact our stock price. Under current federal regulations, subject to certain exceptions, we may not repurchase shares of our common stock during the first year following the completion of the Dodd-Frank Act discussed above may have a material effect uponconversion. Further, Federal Reserve policy generally limits our future financial performance by themselves, the specific impact of the Dodd-Frank Act cannot be determined with specificity until after all required or otherwise proposed regulations are issued in final form. We believe that our operating income will be adversely affected, as will the operating income of other community financial institutions, in the future as a consequence of the implementation of the Dodd-Frank Act. Because of the current uncertainty about the schedule of implementation, the breadth of the regulations expectedability to be issued, and other similar factors, we cannot quantify the amount of any adverse impact.repurchase stock. For further information, see “Our Policy Regarding Dividends” on page     .

We depend on our management team to implement our business strategy and execute successful operations and we could be harmed by the loss of their services. We are dependent upon the services of our management

team. Our strategy and operations are directed by the executive management team. Any loss of the services of our President and Chief Executive Officer or other members of our management team could impact our ability to implement our business strategy, and have a material adverse effect on our future business, results of operations, financial condition and the value of our ability to compete in our markets.common stock.

The fair value of our investments could decline.As of MarchDecember 31, 2011,2013, approximately 88.1% of our entire investment portfolio was designated as available-for-sale. Unrealized gains and losses in the estimated value of the available-for-sale portfolio must be “marked to market” and reflected as a separate item in shareholders’ equity (net of tax) as accumulated other comprehensive income. Shareholders’ equity will continue to reflect the unrealized gains and losses (net of tax) of these investments. The fair value of our investment portfolio may decline, causing a corresponding decline in shareholders’ equity.

Continued or further declines in the value of certain investment securities could require write-downs, which would reduce our earnings.Our securities portfolio includes securities that have declined in value due to negative perceptions about the health of the municipal securities sector. A prolonged decline in the value of these or other securities could result in an other-than-temporary impairment write-down which would reduce our earnings.

IfLiquidity risk could impair our investment inability to fund operations and jeopardize our financial condition, results of operations and cash flows. Liquidity is essential to our business. Our ability to implement our business strategy will depend on our ability to obtain funding for loan originations, working capital, possible acquisitions and other general corporate purposes. An inability to raise funds through deposits, borrowings, securities sold under repurchase agreements, the common stocksale of theloans and other sources could have a substantial negative effect on our liquidity. From time to time we rely on deposits obtained through intermediaries, Federal Home Loan Bank (“FHLB”) of Atlanta is classified as other-than-temporarily impairedadvances, securities sold under agreements to repurchase and other wholesale funding sources to obtain the funds necessary to manage our balance sheet.

Our access to funding sources in amounts adequate to finance our activities or as permanently impaired, our earnings and shareholders’ equity could decrease. We own common stock of the FHLB of Atlanta. We hold this stockon terms which are acceptable to qualify for membership in the FHLB system and to be eligible to borrow funds under the FHLB of Atlanta’s credit advances program. The aggregate cost and fair value of our FHLB of Atlanta common stock as of March 31, 2011 was $11.0 million, based on its par value. There is no market for this stock.

Published reports indicate that certain member banks of the FHLB system may be subject to accounting rules and asset quality risks that could result in materially lower regulatory capital levels. In an extreme situation, it is possible that the capital of a FHLB, including the FHLB of Atlanta, could be substantially diminished or reduced to zero. Consequently, we believe that there is a risk that our investment in FHLB of Atlanta common stockus could be impaired at some timeby factors that affect us specifically or the financial services industry or economy in general, including a decrease in the future,level of our business activity as a result of a downturn in the markets in which our loans are concentrated or adverse regulatory action against us. Our ability to borrow could also be impaired by factors that are not specific to us, such as a disruption in the financial markets or negative views and if this occurs, it would causeexpectations about the prospects for the financial services industry. To the extent we are not successful in obtaining such funding, we will be unable to implement our earningsstrategy as planned which could have a material adverse effect on our financial condition, results of operations and shareholders’ equity to decrease by the after-tax amount of the impairment charge.cash flows.

Changes in accounting standards could affect reported earnings.The accounting standard setters, including the Public Company Accounting Oversight Board (“PCAOB”), the Financial Accounting Standards Board (“FASB”), the SECSecurities and Exchange Commission (“SEC”) and other regulatory bodies, periodically change the financial accounting and reporting standards that governs or will govern, following the conversion, the preparation of our consolidated financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply new or revised guidance retroactively.

The FASB is moving forward with its proposal to change the manner in which the allowance for credit losses is established and evaluated from the concept of incurred losses to that of expected losses. The effect of this change in accounting standard on our financial position and results of operations has not been quantified; however, if it results in a material increase in our allowance and future provisions for credit losses, this could have a material adverse effect on our financial condition and results of operations.

We are subject to environmental liability risk associated with our lending activities. A significant portion of our loan portfolio is secured by real property. During the ordinary course of business, we may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, we may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require us to incur substantial expenses and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations of enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although we have policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on our future business, results of operations, financial condition and resultsthe value of operations.our common stock.

Severe weather, natural disasters, acts of war or terrorism, and other external events could significantly impact our business.Severe weather, natural disasters, acts of war or terrorism, and other adverse external events could have a significant impact on our ability to conduct business. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue, and/or cause us to incur additional expenses. Although management has established disaster recovery plans and procedures, the occurrence of any such event could have a material adverse effect on our future business, results of operations, financial condition and resultsthe value of operations.our common stock.

Risks Related to the Offering

Our ability to realize our deferred tax asset and deduct certain future losses could be limited if we experience an ownership change as defined in the Internal Revenue Code of 1986, as amended (“Code”). Section 382 of the Code may limit the benefit of both net operating losses incurred to date and future “built-in-losses” which may exist at the time of an “ownership change” for federal income tax purposes. A Section 382 “ownership change” occurs if a shareholder or a group of shareholders who are deemed to own at least 5% of our common stock increase their ownership in aggregate by more than 50% over their lowest ownership percentage within a testing period which is generally a rolling three-year period. If an “ownership change” occurs, Section 382 would impose an annual limit on the amount of losses we can use to reduce our taxable income equal to the product of the total value of our outstanding equity (potentially subject to certain adjustments) immediately prior to the “ownership change” and the federal long-term tax-exempt interest rate in effect for the month of the “ownership change.” A number of special rules apply to calculating this limit. The completion of this offering could cause us to experience an “ownership change” if more than 50% of the shares sold in the offering are sold to persons who are not members of Macon Bancorp. Even if we do not experience an “ownership change” immediately following the closing of the offering, the conversion and the offering

materially increase the risk that we could experience an “ownership change” in the future. In order to reduce the likelihood that future transactions in our common stock will result in an “ownership change”, we could adopt a shareholder rights plan to provide an economic disincentive for any person or group to become an owner, for relevant tax purposes, of 4.99% or more of our common stock. The relevant calculations under Section 382 are technical and highly complex. If an “ownership change” were to occur, it is possible that the limitations imposed could cause a net increase in our federal income tax liability and cause federal income taxes to be paid earlier than if such limitations were not in effect. An ownership change could also eliminate a portion of the federal tax loss carryforward if the limitation is low and causes our net operating losses to expire unutilized. Any such “ownership change” could have a material adverse effect on our future business, results of operations, financial condition and the value of our common stock.

We have broad discretion in using the net proceeds of the offering. Our failure to effectively use such proceeds could reduce our profits. We willintend to contribute up to 90%85% of the net proceeds to the Bank to strengthen its capital position and help expedite plans to dispose of adversely classified assets.position. Subject to the terms of the Bancorp MOU,Written Agreement requiring FRB approval, if it has not then been terminated, we may use the remaining net proceeds to pay dividends to shareholders, resume payments of dividends on our trust preferred securities, as well as previously deferred dividends and interest, repurchase shares of our common stock, purchase investment securities, make further investments in the Bank, acquire other financial services companies or for other general corporate purposes. Subject to the terms of the Consent Order, if it has not then been terminated, and any other required regulatory approvals, the Bank may use the proceeds it receives to fund new loans, establish or acquire new branches, purchase investment securities, reduce a portion of our borrowings, or for general corporate purposes. We have not identified specific amounts of proceeds for any of these purposes and we will have significant flexibility in determining the amount of net proceeds we apply to different uses and the timing of such applications. Our failure to utilize these funds effectively could reduce our profitability. We have not established a timetable

for the effective deployment of the proceeds and we cannot predict how long we will require to effectively deploy the proceeds.

The future price of our common stock may be less than the purchase price in the offering. If you purchase shares of common stock in the offering, you may not be able to sell them at or above the purchase price in the offering. The aggregate purchase price of the shares of common stock sold in the offering is determined by an independent, third-party appraisal. The appraisal is not intended, and should not be construed, as a recommendation of any kind as to the advisability of purchasing shares of common stock. Following the completion of the offering, our aggregate pro forma market value will be based on the market trading price of the shares, and not the final, approved independent appraisal, which may result in our stock trading below the initial offering price of $10.00 per share.

Our return on equity will be low following the conversion and the offering. This could negatively affect the trading price of our shares of common stock. Net income divided by average equity, known as “return on equity,” is a ratio many investors use to compare the performance of a financial institution to its peers. Following the conversion and the offering, we expect our consolidated equity to be between $66.5 million at the minimum of the offering range and $86.0 million at the adjusted maximum of the offering range. Based upon our pro forma net income for the year ended December 31, 2013, and these pro forma equity levels, our return on equity would be -0.47% and -0.28% at the minimum and adjusted maximum of the offering range, respectively. We expect our return on equity to remain low until we are able to leverage the additional capital

we receive from the stock offering. Although we will be able to increase net interest income using proceeds of the stock offering, our return on equity will be negatively affected by higher expenses from the costs of being a public company and added expenses associated with the stock-based benefit plans we intend to adopt. Until we can increase our net interest income and noninterest income and leverage the capital raised in the stock offering, we expect our return on equity to remain low, which may reduce the value of our shares of common stock.

Our stock-based benefit plans will increase our costs, which will reduce our income.Our current intention is to adopt one or more stock-based benefit plans after the stock offering that would award participants shares of our common stock (at no cost to them) and/or options to purchase shares of our common stock. The number of shares of restricted stock or stock options reserved for issuance under any initial stock-based benefit plan will not exceed 3% and 7%, respectively, of our total outstanding shares, if these plans are adopted within 12 months after the completion of the conversion. We may grant shares of common stock and stock options in excess of these amounts provided the stock-based benefit plans are adopted more than one year following the conversion and the offering. Assuming a $10.00 per option exercise price and an estimated grant-date fair value of the options utilizing a Black-Scholes option pricing analysis of $3.33 per option granted, with the value amortized over a five-year vesting period, the corresponding annual pre-tax expense associated with the stock options would be $0.2 million at the adjusted maximum of the offering range. In addition, assuming that all shares of restricted stock are awarded at a price of $10.00 per share, and that the awards vest over a five-year period, the corresponding annual pre-tax expense associated with restricted stock awarded under a stock-based benefit plan would be $0.2 million at the adjusted maximum. However, if we grant shares of common stock or options in excess of these amounts, such grants would increase our costs further. The shares of restricted stock granted under a stock-based benefit plan will be expensed by us over their vesting period at the fair market value of the shares on the date they are awarded.

We have never issued capital stock and there is no guarantee that a liquid market will develop. We have never issued capital stock and there is no established market for our common stock. We expect that our common stock will be listed for trading on the NASDAQ Global Market under the symbol ,“ENFC,” subject to completion of the offering and compliance with certain conditions, including the presence of at least three registered and active market makers. Raymond JamesSandler O’Neill & Associates, Inc.Partners, L.P. (“Sandler O’Neill”) has advised us that it intends to make a market in shares of our common stock following the offering, but it is under no obligation to do so or to continue to do so once it begins. While we will attempt before completion of the offering to obtain commitments from at least two other broker-dealers to make a market in shares of our common stock, we may not be able to obtain such commitments. This would result in our common stock not being listed for trading on the NASDAQ Global Market, which could reduce the liquidity of our common stock.

Our ability to realize our deferred tax asset and deduct certain future losses could be limited if we experience an ownership change as defined in the Internal Revenue Code of 1986, as amended (“Code”). Section 382 of the Code may limit the benefit of both net operating losses incurred to date and future “built-in-losses” which exist at the time of an “ownership change.” A Section 382 “ownership change” occurs if a shareholder or a group of shareholders who are deemed to own at least 5% of our common stock increase their ownership by more than 50% over their lowest ownership percentage within a rolling three-year period. If an “ownership change” occurs, Section 382 would impose an annual limit on the amount of losses we can use to reduce our taxable income equal to the product of the total value of our outstanding equity immediately prior to the “ownership change” and the federal long-term tax-exempt interest rate in effect for the month of the “ownership change.” A number of special rules apply to calculating this limit. The limitations contained in Section 382 apply for a five-year period beginning on the date of the “ownership change” and any losses that are limited by Section 382 may be carried forward and reduce our future taxable income for up to 20 years, after which they expire. The completion of this offering could cause us to experience an “ownership change”. Even if we do not experience an “ownership change” immediately following the closing of the offering, the conversion and the offering materially increase the risk that we could experience an “ownership change” in the future. The relevant calculations under Section 382 are technical and highly complex. If an “ownership change” were to occur, it is possible that the limitations imposed could cause a net increase in our federal income tax liability and cause federal income taxes to be paid earlier than if such limitations were not in effect. Any such “ownership change” could have a material adverse effect on our results of operations and financial condition.

We will need to implement additional finance and accounting systems, procedures and controls in order to satisfy our new public company reporting requirements. This will increase our operating expenses. In connection with the offering, we are becoming a public company. Following the conversion, federal securities laws and regulations of the SEC will require that we file annual, quarterly and current reports and that we maintain effective disclosure controls and procedures and internal control over financial reporting. We expect that the obligations of being a public company, including substantial public reporting obligations, will require significant expenditures and place additional demands on our management team. These obligations will increase

our operating expenses and could divert our management’s attention from our operations. Compliance with the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and the related rules and regulations of the SEC will require us to certify the adequacy of our internal controls and procedures, which will require us to upgrade our accounting and reporting processes, and hire additional accounting, internal audit and/or compliance personnel, which will increase our operating costs.

The implementation of stock-based benefit plans may dilute your ownership interest and increase our costs, which will reduce our income. Historically, shareholders have approved these stock-based benefit plans.We intend to adopt one or more stock-based benefit plans, no sooner than 12six months after the offering, which will allow participants to be awarded shares of common stock (at no cost to them) or options to purchase shares of our common stock, following the offering. Any awards of common stock will be expensed by us over their vesting period at the fair market value of the shares on the date they are awarded. These stock-based benefit plans will be funded through either open market purchases of shares of common stock and/or from the issuance of authorized but unissued shares of common stock. Our ability to repurchase

shares of common stock to fund these plans will be subject to many factors, including, but not limited to, applicable regulatory restrictions on stock repurchases, the availability of stock in the market, the trading price of the stock, our capital levels, alternative uses for our capital and our financial performance. Although our current intention is to fund these plans with stock repurchases, we may not be able to conduct such repurchases. If we do not repurchase shares of common stock to fund these plans, then shareholders would experience a reduction in their ownership interest.interest, which would total 9.1% in the event newly issued shares are used to fund stock options or awards of shares of common stock under these plans in an amount equal to 7% and 3%, respectively, of the shares issued in the stock offering. We may grant shares of common stock and stock options in excess of these amounts provided the stock-based benefit plan is adopted more than one year following the conversion and the offering.

We may adopt stock-based benefit plans more than one year following the conversion and the offering. Stock-based benefit plans adopted more than one year following the conversion and the offering may exceed regulatory restrictions on the size of stock-based benefit plans adopted within one year, which would further increase our costs.If we adopt stock-based benefit plans more than one year following the completion of the stock offering, then grants of shares of common stock or stock options under our stock-based benefit plans may exceed 3% and 7%, respectively, of our total outstanding shares. Stock-based benefit plans that provide for awards in excess of these amounts would increase our costs beyond the amounts estimated in “– Our stock-based benefit plans will increase our costs, which will reduce our income.” Stock-based benefit plans that provide for awards in excess of these amounts could also result in dilution to shareholders in excess of that described in “– The implementation of stock-based benefit plans will dilute your ownership interest.” Although the implementation of the stock-based benefit plan will be subject to shareholder approval, historically, the overwhelming majoritydetermination as to the timing of the implementation of such a plan will be at the discretion of our Board of Directors. Our current intention is to adopt one or more stock-based benefit plans adopted by savings institutions and their holding companies following mutual-to-stock conversions have been approved by shareholders.no earlier than six months after completion of the conversion.

We intend to enter into employment and change of controlseverance and non-competition agreements with certain of our officers, all of which may increase our compensation costs or increase the cost of acquiring us. We intend to enter into employment and change of control agreements with Roger D. Plemens, our President and Chief Executive Officer, W.Officer; Ryan M. Scaggs, our Chief Operating Officer; and David Sweatt, Executive Chairman of the Bank,A. Bright, our Chief Financial Officer; and Gary L. Brown,severance and non-

competition agreements with Carolyn H. Huscusson, our First Vice President andChief Retail Officer; Bobby D. Sanders, II, our Chief Credit Officer.Administration Officer; Laura W. Clark, our Chief Risk Officer; and Marcia J. Ringle our Corporate Secretary. In the event of termination of employment of all threeseven of these persons other than for cause, or in the event of certain types of termination following a change in control, as set forth in the agreements, and assuming the agreements were in effect, the agreements provide for cash severance benefits that would cost up to approximately $$2.5 million in the aggregate.

Bancorp has outstanding subordinated debentures, which will rank senior to our common stock.Bancorp has issued $14.4 million in subordinated debentures in connection with the issuance of trust preferred securities by its trust subsidiary. These debentures will rank senior to shares of our common stock. As a result, we must make dividend payments on the trust preferred securities before any dividends can be paid on the common stock and, in the event of our bankruptcy, dissolution or liquidation, the holders of the trust preferred securities must be satisfied before any distributions can be made on the common stock. Interest expense on the subordinated debentures was $0.5 million and $0.5 million for the years ended December 31, 2013 and December 31, 2012, respectively. In order to preserve capital, as required by the Bancorp MOU,Written Agreement, Bancorp has deferred payment of dividends on the trust preferred securities since December 30, 2010, and we do not intend to seek FRB approval to resume paying dividends until after the offering closes. As of December 31, 2013, the amount of accrued and unpaid interest was $1.6 million. If we do not resume payment of dividends on the trust preferred securities including payment of any deferred dividends and applicable interest, no dividends may be paid on the common stock. If we do not resume payment of dividends on the trust preferred securities including payment of any deferred dividends and applicable interest, before December 2015, we will be considered to be in default.default, at which point the holders of our trust preferred securities could declare all principal and deferred interest due and payable.

Our articles of incorporation and bylaws may prevent or impede the holders of our common stock from obtaining representation on the Board of Directors and may impede any takeovers of us; this may negatively affect our stock price. Provisions in our articles of incorporation, as amended and restated, (our “Articles”) and bylaws, as amended and restated, (our “Bylaws”) may prevent or impede holders of our common stock from obtaining representation on our Board of Directors and may make takeovers of us more difficult. For example, it is anticipated that following our first annual meeting of shareholders our Board of Directors will be divided into three staggered classes. A classified board of directors makes it more difficult for shareholders to change a majority of the directors because it generally takes at least two annual elections of directors for this to occur. Our Articles include a provision that for three years following the conversion, no person will be entitled to vote any shares of our common stock in excess of 10% of our outstanding shares of common stock. Our Articles and Bylaws restrict who may call special meetings of shareholders and how directors may be removed from office. Additionally, in certain instances, a supermajority vote of our shareholders may be required to approve a merger or other business combination with a large shareholder, if the proposed transaction is not approved by a majority of our directors. See “– Certain Restrictions Having Anti-Takeover Effect”“Restrictions on Acquisition of Entegra – “Anti-takeover” effects of Entegra’s Articles of Incorporation and Bylaws” on page.

A significant percentage of our common stock will be held or controlled by our directors and executive officers and benefit plans.Our Board of Directors and executive officers intend to purchase in the aggregate approximately 6.02% and 4.45% of our common stock at the minimum and maximum of the offering range,

respectively. These purchases, together with the potential acquisition of common stock through the stock-based benefit plans we intend to adopt will result in ownership by insiders of the Bank and Entegra of approximately 14.5% of the total shares issued in the offering at the maximum and approximately 16.0% of the total shares issued in the offering at the minimum of the offering range. The ownership by executive officers and directors could result in actions being taken that are not in accordance with other shareholders’ wishes, and could prevent any action requiring a supermajority vote under our Articles and Bylaws (including the amendment of certain protective provisions of our Articles and Bylaws discussed immediately above).

We are an emerging growth company within the meaning of the Securities Act, and if we decide to take advantage of certain exemptions from various reporting requirements applicable to emerging growth companies, our common stock could be less attractive to investors.We are an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act (the “JOBS Act”). We are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, reduced disclosure about our executive compensation and omission of compensation discussion and analysis, and an exemption from the requirement of holding a non-binding advisory vote on executive compensation. In addition, we will not be subject to certain requirements of Section 404 of the Sarbanes-Oxley Act of 2002, including the additional level of review of our internal control over financial reporting as may occur when outside auditors attest as to our internal control over financial reporting. As a result, our shareholders may not have access to certain information they may deem important.

We could remain an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1.0 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1.0 billion in non-convertible debt during the preceding three-year period. Taking advantage of any of these exemptions may adversely affect the value and trading price of our common stock.

We have elected to delay the adoption of new and revised accounting pronouncements, which means that our financial statements may not be comparable to those of other public companies.As an “emerging growth company,” we have elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.

Our common stock will not be FDIC insured. Our common stock is not a savings or deposit account or other obligation of any bank and is not insured by the FDIC or any other governmental agency and is subject to investment risk, including the possible loss of principal. Investment in our common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this prospectus and is subject to the same market forces that affect the price of common stock in any company. As a result, holders of our common stock may lose some or all of their investment.

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The summary financial information presented below is derived in part from our Consolidated Financial Statements. The following is only a summary and you should read it in conjunction with the Consolidated Financial Statements and Notes beginning on page. F-1. The information at December 31, 20102013 and 20092012 and for the years ended December 31, 20102013 and 20092012 is derived in part from our audited Consolidated Financial Statements that appear in this prospectus. The operating data for the three months ended March 31, 2011 and 2010 and the financial condition data at March 31, 2011 and 2010, was not audited. However, in the opinion of our management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results of operations for the unaudited periods have been made. No adjustments were made other than normal recurring entries. The results of operations for the three months ended March 31, 2011 are not necessarily indicative of the results of operations that may be expected for the entire year.

 

   At March  31,
2011
   At December 31, 
    2010   2009   2008   2007   2006 
   (Dollars in thousands) 

Selected Financial Condition Data:

            

Total assets

  $932,845    $1,021,777    $1,078,537    $1,114,528    $1,047,901    $988,363  

Cash and cash equivalents

   20,290     18,048     34,344     26,629     16,145     14,360  

Securities available for sale

   154,803     216,797     193,577     208,484     139,784     135,521  

Loans receivable, net

   667,714     698,309     753,966     802,804     819,615     784,578  

Bank owned life insurance

   18,476     18,315     17,701     17,074     10,631     11,739  

FHLB stock, at cost

   10,979     10,979     12,288     12,616     13,522     10,065  

Real estate owned

   23,491     21,511     22,829     5,531     2,198     1,651  

Deposits

   782,135     798,419     790,408     716,005     675,896     697,989  

FHLB advances

   65,900     128,400     178,400     238,400     259,950     183,500  

Securities sold under agreements to repurchase

   —       —       —       —       —       10,000  

Other borrowings

   —       —       —       40,000     —       —    

Junior subordinated debt

   14,433     14,433     14,433     14,433     14,433     14,433  

Total net worth

   56,330     65,968     81,631     88,744     81,080     69,792  

  At December 31, 
  2013 2012 2011 2010 2009 
  (Dollars in thousands) 

Selected Financial Condition Data:

      

Total assets

  $784,554   $769,939   $874,706   $1,021,777   $1,078,537  

Cash and cash equivalents

   34,316   25,362   14,601   18,048   34,344  

Investment Securities

   176,472   131,091   190,750   216,797   193,577  

Loans receivable, net

   507,623   545,850   598,839   698,309   753,966  

Bank owned life insurance

   19,961   19,479   18,943   18,315   17,701  

FHLB stock, at cost

   2,724   2,437   6,490   10,979   12,288  

REO

   10,506   19,755   16,830   21,511   22,829  

Deposits

   684,226   675,098   750,832   798,419   790,408  

FHLB advances

   40,000   25,000   52,400   128,400   178,400  

Junior subordinated debt

   14,433   14,433   14,433   14,433   14,433  

Total equity

   32,518   42,294   43,484   65,968   81,631  
  For the three months ended March 31, For the years ended December 31,   For the years ended December 31, 
  2011 2010 2010 2009 2008   2007   2006   2013 2012 2011 2010 2009 
  (Dollars in thousands)   (Dollars in thousands) 

Selected Operating Data:

                

Interest and dividend income

  $10,314   $12,521   $47,326   $56,020   $64,725    $71,599    $64,934    $31,257   $34,274   $39,483   $47,326   $56,020  

Interest expense

   4,243    5,508    20,451    26,115    33,296     38,323     32,364     6,988   9,635   14,572   20,451   26,115  
                          

 

  

 

  

 

  

 

  

 

 

Net interest income

   6,071    7,013    26,875    29,905    31,429     33,276     32,570     24,269    24,639    24,911    26,875    29,905  

Provision for loan losses

   9,765    3,849    18,926    21,851    6,210     1,995     1,695     4,358    7,878    24,116    18,926    21,851  
                          

 

  

 

  

 

  

 

  

 

 

Net interest and dividend income (loss) after provision for loan losses

   (3,694  3,164    7,949    8,054    25,219     31,281     30,875  

Noninterest income

   2,682    2,006    6,689    8,292    6,412     6,221     6,281  

Noninterest expense

   7,885    5,870    25,191    30,224    22,206     21,588     20,251  

Net interest and dividend income after provision for loan losses

   19,911    16,761    795    7,949    8,054  

Noninterest income (excluding gain on sale of investments)

   6,031    4,920    4,714    5,024    6,876  

Gain on sale of investments

   358    3,294    1,635    1,665    1,416  

Noninterest expense (excluding REO operations, valuation and loss)

   20,628    19,605    22,737    19,194    20,796  

REO operations, valuation and loss

   5,612    5,448    9,013    5,997    9,428  
                          

 

  

 

  

 

  

 

  

 

 

Income (loss) before income tax expense (benefit)

   (8,897  (700  (10,553  (13,878  9,425     15,914     16,905     60    (78  (24,606  (10,553  (13,878

Income tax expense (benefit)

   —      (463  3,705    (6,091  2,964     5,206     6,364     475    (1,011  1,374    3,705    (6,091
                          

 

  

 

  

 

  

 

  

 

 

Net income (loss)

  $(8,897 $(237 $(14,258 $(7,787 $6,461    $10,708    $10,541    $(415 $933   $(25,980 $(14,258 $(7,787
                          

 

  

 

  

 

  

 

  

 

 

 At or for the three months ended
March 31,
 At or for the years ended December 31,   At or for the years ended December 31, 
 2011 2010 2010 2009 2008 2007 2006   2013 2012 2011 2010 2009 

Selected Financial Ratios and Other Data (1) :

             

Performance Ratios:

             

Return on average assets (ratio of net income to average total assets)

  (3.49)%   (0.09)%   (1.32)%   (0.70)%   0.60  1.05  1.10   (0.05)%  0.11 (2.77)%  (1.33)%  (0.70)% 

Return on average equity (ratio of net income to average equity)

  (56.94  (1.16  (17.98  (8.82  7.68    14.17    16.51     (1.01 2.19   (46.42 (17.59 (8.68

Tax equivalent net interest rate spread

  2.58    2.75    2.61    2.70    2.76    2.95    3.30     3.30   3.19   2.78   2.59   2.67  

Tax equivalent net interest margin

  2.71    2.93    2.77    2.95    3.13    3.43    3.65     3.40   3.30   2.92   2.79   2.96  

Efficiency ratio (2)(1)

  90.08    65.08    75.05    79.13    58.68    54.66    52.12     85.59   76.26   101.57   75.05   79.13  

Core efficiency ratio (3)(2)

  67.72    54.67    57.19    54.44    55.84    54.34    51.78     68.08   65.35   70.49   60.17   56.54  

Noninterest expense to average total assets

  3.10    2.17    2.33    2.71    2.05    2.11    2.11     3.37   3.07   3.38   2.35   2.72  

Average interest-earning assets to average interest-bearing liabilities

  107.07    107.95    108.17    109.88    111.55    112.26    109.58     110.47   108.75   108.57   110.06   111.68  

Equity to assets

  6.04    7.54    6.46    7.57    7.96    7.74    7.06  

Tangible equity to tangible assets (4)

  5.80    7.29    6.22    7.31    7.71    7.42    6.76  

Tangible equity to tangible assets (3)

   4.14   5.49   4.97   6.46   7.57  

Average equity to average assets

  6.14    7.54    7.34    7.91    7.76    7.38    6.66     5.27   5.23   5.96   7.56   8.09  

Asset Quality Ratios:

             

Non-performing loans to total loans (5)

  10.59  6.34  10.53  5.64  5.31  0.69  0.54

Non-performing loans to total loans (4)

   2.99 3.16 6.75 8.45 2.78

Non-performing assets to total assets (5)

  10.36    6.71    9.50    6.17    4.40    0.76    0.60     3.33   4.87   6.67   8.02   4.10  

Allowance for loan losses to non-performing loans

  28.52    20.11    22.75    40.67    30.27    165.11    188.23     91.19   83.91   40.22   28.43   82.90  

Allowance for loan losses to total loans

  3.03    2.42    2.40    2.30    1.61    1.15    1.02     2.73   2.65   2.71   2.40   2.30  

Net charge-offs to average loans

  3.48    1.76    2.61    2.17    0.31    0.07    0.02     0.93   1.66   3.67   2.61   2.17  

Loan loss provision/ net charge-offs

  160.19    114.42    97.04    126.70    242.29    1,042.04    1,086.54     87.49   81.10   98.03   97.04   126.70  

Capital Ratios (Bank level only):

             

Total capital (to risk-weighted assets)

  11.55  13.46  12.18  13.36  13.86  12.94  12.10   11.97 11.49 10.29 12.18 13.36

Tier I capital (to risk-weighted assets)

  10.28    12.20    10.91    12.10    12.60    11.75    11.03     10.70   10.22   9.02   10.91   12.10  

Tier I capital (to average assets)

  7.07    8.78    7.63    8.55    9.25    9.18    8.44     7.02   7.16   6.16   7.63   8.55  

Capital Ratios (Company):

             

Total capital (to risk-weighted assets)

  11.54  13.48  12.18  13.38  13.88  12.96  12.12   11.79 11.31 10.25 12.18 13.38

Tier I capital (to risk-weighted assets)

  10.27    12.22    10.92    12.12    12.63    11.78    11.06     10.52   10.04   8.98   10.92   12.12  

Tier I capital (to average assets)

  7.06    8.79    7.64    8.57    9.30    9.20    8.46     6.90   7.03   6.13   7.64   8.57  

Other Data:

             

Number of offices

  11    11    11    11    11    11    10     11   11   11   11   11  

Full time equivalent employees

  175    178    175    179    188    196    192     185   169   163   175   179  

 

(1)Financial ratios for the quarters ended March 31, 2011 and 2010 are annualized.
(2)The efficiency ratio represents noninterest expense divided by the sum of net interest income and noninterest income.
(3)(2)The core efficiency ratio represents noninterest expense excluding loss on real estate owned, real estate owned expense, and in the March 31, 2011 quarter, gain on sale of investments and FHLB advance prepayment fee expense,prepayments, divided by the sum of net interest income and noninterest income. Quarter ended March 31, 2011 securities gains and FHLB advance prepayment expense resulted from a one-time portfolio restructuring. See “Comparisonincome, excluding gain on sale of Operating results for the Three Months Ended March 31, 2011 and 2010” on page.investments.
(3)MSR’s are included in tangible assets
(4)Tangible equity and tangible assets are net of mortgage servicing rights, which are the only intangible asset.
(5)Non-performing loans include non-accruing loans, loans delinquent 90 days or greater and still accruing interest, and troubled debt restructurings still accruing interest.
(5)Non-performing assets include non-performing loans and real estate owned.

The following table shows the differences between the efficiency ratio calculated in accordance with accounting principles generally accepted in the United States (“GAAP”) and the core efficiency ratio calculated on a non-GAAP basis for the periods indicated, and the adjustments to reconcile equity to tangible equity.indicated:

 

   For the three months ended
March 31,
  For the years ended December 31, 
   2011  2010  2010  2009  2008  2007  2006 

Efficiency ratio

   90.08  65.08  75.05  79.13  58.68  54.66  52.12

Non interest expense - GAAP

  $7,885   $5,870   $25,191   $30,224   $22,206   $21,588   $20,251  

Effect to adjust non interest expense:

        

Loss on real estate owned

   845    827    5,127    8,690    837    30    26  

Real estate owned expense

   806    112    870    738    237    96    107  

FHLB advance prepayment - restructuring transaction

   1,412    —      —      —      —      —      —    
                             

Core Non interest expense

  $4,822   $4,931   $19,194   $20,796   $21,132   $21,462   $20,118  

Non interest income - GAAP

  $2,682   $2,006   $6,689   $8,292   $6,412   $6,221   $6,281  

Effect to adjust non interest income:

        

Gain on sale of investments - restructuring transaction

   1,633    —      —      —      —      —      —    
                             

Core non interest income

  $1,049   $2,006   $6,689   $8,292   $6,412   $6,221   $6,281  

Net interest income - GAAP

   6,071    7,013    26,875    29,905    31,429    33,276    32,570  

Net effect to adjust core efficiency ratio

   22.36  10.41  17.87  24.68  2.84  0.32  0.34

Core efficiency ratio

   67.72    54.67    57.19    54.44    55.84    54.34    51.78  
   For the quarter ended
March 31,
   For the years ended December 31, 
   2011   2010   2009   2008   2007   2006 

Equity

  $56,330    $65,968    $81,631    $88,744    $81,080    $69,792  

Effect to adjust for intangibles:

            

Mortgage loan servicing rights

   2,370     2,533     3,024     3,042     3,582     3,210  
                              

Tangible equity

  $53,960    $63,435    $78,607    $85,702    $77,498    $66,582  
   For the years ended December 31, 
   2013  2012  2011  2010  2009 

(Dollars in thousands)

      

Efficiency ratio - GAAP

   85.59  76.26  101.57  75.05  79.13

Non interest expense - GAAP

  $26,240   $25,053   $31,750   $25,191   $30,224  

Effect to adjust non interest expense:

      

Losses on sale and valuation of real estate owned

   4,256    3,292    6,681    5,127    8,690  

Real estate owned expense

   1,356    2,156    2,332    870    738  

FHLB advance prepayment

   —      287    1,854    —      —    
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Core non interest expense - non GAAP

  $20,628   $19,318   $20,883   $19,194   $20,796  

Non interest income - GAAP

  $6,389   $8,214   $6,349   $6,689   $8,292  

Effect to adjust non interest income:

      

Gain on sale of investments

   358    3,294    1,635    1,665    1,416  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Core non interest income - non GAAP

  $6,031   $4,920   $4,714   $5,024   $6,876  

Net interest income - GAAP

   24,269    24,639    24,911    26,875    29,905  

Net effect to adjust core efficiency ratio

   17.51  10.91  31.08  14.88  22.59

Core efficiency ratio

   68.08  65.35  70.49  60.17  56.54

The core efficiency ratio above excludes the effects of lossvaluation losses and losses from the sale of REO and REO expenses from the maintenance of properties while held as REO. The core efficiency ratio also excludes gains from the March 31, 2011 quarter gain on sale of investments incomeinvestment and FHLB prepayment fees that resulted from restructuring to our balance sheet.

The following table shows the differences between income (loss) before taxes calculated in accordance with GAAP and income (loss) before taxes calculated on a non-GAAP basis for the periods indicated:

   Years Ended December 31, 
   2013  2012  2011 
   (Dollars in thousands) 

Income (loss) before taxes - GAAP

  $60    (78  (24,606

Effect to adjust income (loss) before taxes:

    

Provision for loan losses

  $4,358    7,878    24,116  

Gain on sale of investments

   (358  (3,294  (1,635

Real estate owned operations

   1,356    2,156    2,332  

Real estate owned valuation

   4,093    2,089    6,042  

Loss on real estate owned

   163    1,203    639  
  

 

 

  

 

 

  

 

 

 

Net adjustment to income (loss) before taxes

  $9,612    10,032    31,494  
  

 

 

  

 

 

  

 

 

 

Core income (loss) before taxes - non-GAAP

  $9,672    9,954    6,888  
  

 

 

  

 

 

  

 

 

 

Core income (loss) before taxes excludes the provision for loan losses, gain on sale of investments, and REO operations, loss on sale and valuation expenses. The purpose of this non-GAAP measurement is to illustrate the core level of profitability before the impact of credit related losses and the impact of net non-recurring gains from the sale of investments.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning. These forward-looking statements include, but are not limited to:

 

statements of our goals, intentions and expectations;

 

statements regarding our business plans, prospects, growth and operating strategies;

 

statements regarding the asset quality of our loan and investment portfolios; and

 

estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this prospectus.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

our failure to comply with the terms of the Memoranda;

Regulatory Agreements;

 

the effect of the requirements of the MemorandaRegulatory Agreements to which we are subject and any further regulatory actions;

 

our failure to secure the timely termination of the Memoranda;

Regulatory Agreements;

 

general economic conditions, either nationally or in our market areas, that are worse than expected;

 

credit quality deterioration which could cause an increase in the provision for credit losses;

 

competition among depository and other financial institutions;

 

inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;

 

adverse changes in the securities markets;

 

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

 

our ability to enter new markets successfully and capitalize on growth opportunities;

 

our ability to successfully integrate acquired entities, if any;

 

changes in consumer spending, borrowing and savings habits;

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, FASB, the SEC and the PCAOB;

 

changes in our key personnel, and our compensation and benefit plans;

 

changes in our financial condition or results of operations that reduce capital available to pay dividends; and

 

changes in the financial condition or future prospects of issuers of securities that we own.

Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. Please see “Risk Factors” beginning on page.      ..

HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING

Although we cannot determine whatWe intend to invest up to 85% of the actual net proceeds from the sale of the shares of common stockoffering in the offering will be untilBank as capital and retain the offering is completed, we anticipate thatremainder of the net proceeds will be between $39.8 million and $54.3 million, or $62.6 million iffrom the offering range is increased by 15%.offering.

We

The following table summarizes how we intend to use the net proceeds from the offering, as follows:

based on the sale of shares at the minimum, midpoint, maximum and adjusted maximum of the offering range:

  Minimum Midpoint Maximum 

Adjusted

Maximum

 
  (3,655,000 shares) (4,300,000 shares) (4,945,000 shares) (5,686,750 shares) 
  Minimum
(4,250,000 shares)
 Midpoint
(5,000,000 shares)
 Maximum
(5,750,000 shares)
 Adjusted Maximum
(6,612,500 shares)
     % of Net   % of Net   % of Net   % of Net 
  Amount % of Net
Proceeds
 Amount % of Net
Proceeds
 Amount % of Net
Proceeds
 Amount % of Net
Proceeds
   Amount Proceeds Amount Proceeds Amount Proceeds Amount Proceeds 
      (Dollars in thousands)       (Dollars in thousands) 

Offering proceeds

  $42,500    $50,000    $57,500    $66,125     $36,550    $43,000    $49,450    $56,867   

Less: offering expenses

   (2,671   (2,952   (3,557   (3,557    (1,473  (1,550  (1,626  (1,714 
                   

 

   

 

   

 

   

 

  

Net offering proceeds

   39,829    100.0  47,048    100  54,267    100.0  62,568    100.0   35,077    100.0  41,450    100.0  47,824    100.0  55,153    100.0

Use of net proceeds:

                  

Proceeds contributed to Macon Bank

  $35,846    90.0 $42,343    90.0 $48,840    90.0 $56,311    90.0  $29,815    85.0 $33,160    80.0 $35,868    75.0 $38,607    70.0

Proceeds remaining for Macon Financial

   3,983    10.0  4,705    10.0  5,427    10.0  6,257    10.0

Proceeds remaining for Entegra

  $5,262    15.0 $8,290    20.0 $11,956    25.0 $16,546    30.0

The net proceeds may vary because the total expenses of the offering may be more or less than our estimates. For example, our expenses, specifically the commission payable to Raymond James & Associates, Inc.,Sandler O’Neill, would increase if more shares of common stock are sold in a community or syndicated offering to investors other than our officers, directors or employees that are not otherwise eligible to participate in the subscription offering.

OverSubject to receiving any necessary regulatory approvals, over time we intend to use the proceeds we retain from the offering:

 

to resume payment of dividends on our trust preferred securities, as well as previously deferred dividends and interest;

to invest in securities issued by the U.S. Government, U.S. Government agencies and/or U.S. Government sponsored enterprises, mortgage-backed securities and equities, collateralized mortgage obligations and municipal securities;

 

to resume payment of dividends on our trust preferred securities, as well as previously deferred dividends and applicable interest;

to pay cash dividends to shareholders;

to repurchase shares of our common stock; and

 

for other general corporate purposes.

Under current Federal Reserve regulations, we may not repurchase shares of our common stock during the first year following completion of the conversion and offering, except to fund equity benefit plans other than stock options or, with prior regulatory approval, when extraordinary circumstances exist. Also, under the Regulatory Agreements, we are currently restricted from paying cash dividends to our shareholders, repurchasing shares of our common stock and paying dividends on our trust securities. SeeSupervision and Regulation” for a discussion of these and additional regulatory restrictions on our use of the net proceeds. For a discussion of our dividend policy and regulatory matters relating to the payment of dividends, see “Our Policy Regarding Dividends.”

We have not quantified our plans for use of the offering proceeds for any of the foregoing purposes. Initially, we intend to invest a substantial portion of the net proceeds in short-term investments, investment-grade debt obligations and mortgage-backed securities.

The Bank intends to use the net proceeds it receives from the offering:offering as follows:

 

to strengthen its capital position;

 

to fund new loans;

 

to repay borrowings;

 

to invest in mortgage-backed securities and collateralized mortgage obligations, and debt securities issued by the U.S. Government, U.S. Government agencies and/or U.S. Government sponsored enterprises;

 

to expand its banking franchise by establishing or acquiring new branches, or by acquiring other financial institutions or other financial services companies; and

 

for other general corporate purposes.

The Bank has not quantified its plans for use of the offering proceeds for any of the foregoing purposes. Our short-term and long-term growth plans anticipate that, upon completion of the offering, we will experience growth through increased lending and investment activities and, possibly, acquisitions. We currently have no understandings or agreements to establish or acquire new branches, or acquire other banks, thrifts, or other financial services companies. Additionally, there can be no assurance that we will be able to consummate any acquisition.

OUR POLICY REGARDING DIVIDENDS

Notwithstanding the completion of the offering, our Board of Directors may not declare dividends on our shares of common stock, unless and until we have resumed paying dividends on our trust preferred securities and have paid previously deferred dividends and interest, and, if the Bancorp MOUWritten Agreement has not been terminated, we

receive the prior approval of the FRB. Upon satisfying these conditions, our Board of Directors

will have the authority to declare dividends on our shares of common stock subject to statutory and regulatory requirements generally applicable to bank holding companies. However, initially we do not intend to pay cash dividends.

In determining whether to pay a cash dividend in the future and the amount of such cash dividend, our Board of Directors is expected to take into account a number of factors, including capital requirements, our consolidated financial condition and results of operations, tax considerations, statutory and regulatory limitations and general economic conditions. No assurances can be given that the Bancorp MOUWritten Agreement will be terminated following the conversion, or that if not terminated, the FRB will approve either payments for our trust preferred securities or dividends on our common stock. Pursuant to Federal Reserve regulations, we may not make a distribution that would constitute a return of capital during the three years following the completion of the conversion and offering. No assurances can be given that any dividends will be paid or that, if paid, will not be reduced or eliminated in the future. We will file a consolidated federal tax return with the Bank. Accordingly, it is anticipated that any cash distributions made by us to our shareholders would be treated as cash dividends and not as a non-taxable return of capital for federal and state tax purposes.

Pursuant to our Articles, we are authorized to issue preferred stock. If we issue preferred stock, the holders thereof could have a priority over the holders of our shares of common stock with respect to the payment of dividends. For a further discussion concerning the payment of dividends on our shares of common stock, see “–“Description of Our Capital Stock – Common Stock” on page. Initially, dividends we can declare and pay will depend upon the proceeds retained from the offering, the earnings received from the investment of those proceeds and prior approval of the FRB or termination of the Bancorp MOU.Written Agreement. In the future, dividends will depend in large part upon receipt of dividends from the Bank, because we expect to have limited sources of income other than dividends from the Bank. A regulation of the Commissioner imposes limitations on “capital distributions” by savings institutions. See “–“Supervision and Regulation – Restrictions on Dividends and Other Capital Distributions” on page.

Any payment of dividends by the Bank to us that would be deemed to be drawn out of the Bank’s bad debt reserves, if any, would require a payment of taxes at the then-current tax rate by the Bank on the amount of earnings deemed to be removed from the reserves for such distribution. The Bank does not intend to make any distribution to us that would create such a tax liability.

MARKET FOR THE COMMON STOCK

We have never issued capital stock and there is no established market for our shares of common stock. We expect that our shares of common stock will be listed for trading on the NASDAQ Global Market under the symbol ,“ENFC,” subject to completion of the offering and compliance with certain conditions, including the presence of at least three registered and active market makers. Raymond James & Associates, Inc.Sandler O’Neill has advised us that it intends to make a market in shares of our common stock following the offering, but it is under no obligation to do so or to continue to do so once it begins. While we will attempt, before completion of the offering, to obtain commitments from at least two other broker-dealers to make a market in shares of our common stock, there can be no assurance that we will be successful in obtaining such commitments.

The development and maintenance of a public market, having the desirable characteristics of depth, liquidity and orderliness, depends on the presence of willing buyers and sellers, the existence of which is not within our control or that of any market maker. The number of active buyers and sellers of shares of our common stock at any particular time may be limited, which may have an adverse effect on the price at which shares of our common stock can be sold. There can be no assurance that persons purchasing the shares of common stock will be able to sell their shares at or above the $10.00 offering purchase price per share. You should have a long-term investment intent if you purchase shares of our common stock and you should recognize that there may be a limited trading market in the shares of common stock.

HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE

At March 31, 2011 and December 31, 2010,2013, Bancorp and the Bank exceeded all of the applicable regulatory capital ratios to be considered “well capitalized” under the regulatory framework for prompt corrective action. However, pursuant to the Bank MOU,Consent Order, the Bank is required to maintain elevated capital levels. At MarchDecember 31, 2011,2013, the Bank did not satisfy one of the elevated capital ratioslevels required by the Bank MOU.Consent Order. The table below sets forth the historical equity capital and regulatory capital of the Bank at MarchDecember 31, 2011,2013, and the pro forma regulatory capital of the Bank after giving effect to the sale of shares of common stock at a $10.00 per share purchase price. The table assumes the receipt by the Bank of 90%up to 85% of the net offering proceeds. See “How We Intend to Use the Proceeds from the Offering” on page.

    Pro Forma at March 31, 2011       Pro Forma at December 31, 2013 
  Actual, as of
March 31, 2011
 Minimum Midpoint Maximum Maximum as
Adjusted
   

Actual, as of

December 31, 2013

 

Minimum

(3,655,000 Shares)

 

Midpoint

(4,300,000 Shares)

 

Maximum

(4,945,000 Shares)

 

Adjusted Maximum

(5,686,750 Shares)

 
  Amount Percent
of Assets (1)
 Amount   Percent
of Assets
 Amount   Percent
of Assets
 Amount   Percent
of Assets
 Amount   Percent
of Assets
   Amount Percent
of Assets (1)
 Amount   Percent
of Assets
 Amount   Percent
of Assets
 Amount   Percent
of Assets
 Amount   Percent
of Assets
 
  (Dollars in thousands)   (Dollars in thousands) 

Capital and retained earnings under GAAP Bank level

  $70,405    7.55 $106,251     10.97 $112,748     11.56 $119,245     12.15 $126,716     12.81
                                   

Capital and retained earnings under GAAP

               

Bank level

  $47,487   6.06 $76,206     9.38 $79,357     9.73 $81,872     10.00 $84,388     10.28
  

 

  

 

  

 

   

 

  

 

   

 

  

 

   

 

  

 

   

 

 

Tier 1 leverage (2)

  $70,394    7.07 $106,240     10.30 $112,737     10.86 $119,234     11.41 $126,705     12.04  $54,775    7.02 $83,494     10.33 $86,645     10.68 $89,160     10.95 $91,676     11.23

Requirement

   79,687    8.00  82,555     8.00  83,074     8.00  83,594     8.00  84,192     8.00   62,380    8.00  64,678     8.00  64,930     8.00  65,131     8.00  65,332     8.00
                                     

 

  

 

  

 

   

 

  

 

   

 

  

 

   

 

  

 

   

 

 

Excess (Deficit)

  ($9,293  -0.93 $23,685     2.30 $29,663     2.86 $35,640     3.41 $42,513     4.04  ($7,605  -0.98 $18,816     2.33 $21,715     2.68 $24,029     2.95 $26,344     3.23
                                     

 

  

 

  

 

   

 

  

 

   

 

  

 

   

 

  

 

   

 

 

Tier I risk-based (2)

  $70,394    10.28 $106,240     15.35 $112,737     16.26 $119,234     17.16 $126,705     18.20

Requirement

   54,791    8.00  55,365     8.00  55,469     8.00  55,573     8.00  55,692     8.00
                                   

Excess (Deficit)

  $15,603    2.28 $50,875     7.35 $57,266     8.26 $63,661     9.16 $71,013     10.20
                                   

Total risk-based (3)

  $79,109    11.55 $114,955     16.61 $121,452     17.52 $127,949     18.42 $135,420     19.45

Requirement

   82,187    12.00  83,047     12.00  83,203     12.00  83,359     12.00  83,538     12.00
                                   

Excess (Deficit)

  ($3,078  -0.45 $31,908     4.61 $38,249     5.52 $44,590     6.42 $51,882     7.45
                                   

Tier I risk-based(2)

  $54,775     10.70 $83,494    16.12 $86,645    16.71 $89,160    17.18 $91,676    17.65

Requirement

   40,968     8.00  41,428    8.00  41,478    8.00  41,518    8.00  41,559    8.00
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Excess (Deficit)

  $13,807     2.70 $42,066    8.12 $45,167    8.71 $47,642    9.18 $50,117    9.65
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total risk-based(3)

  $61,274     11.97 $89,993    17.38 $93,144    17.96 $95,659    18.43 $98,175    18.90

Requirement

   56,331     11.00  56,963    11.00  57,032    11.00  57,088    11.00  57,143    11.00
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Excess (Deficit)

  $4,943     0.97 $33,030    6.38 $36,112    6.96 $38,571    7.43 $41,032    7.90
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net proceeds contributed by the Bank

     $29,815    $33,160    $35,868    $38,607   

Less: common stock acquired by stock-based benefit plans (4)

      (1,097   (1,290   (1,484   (1,706 
     

 

 

   

 

 

   

 

 

   

 

 

  

Pro forma increase in GAAP and regulatory capital

     $28,718    $31,870    $34,384    $36,901   

 

(1) 

Tier 1 leverage capital levels are shown as a percentage of adjusted average total assets of $996.1$779.8 million. Risk-based capital levels are shown as a percentage of risk-weighted assets of $684.9$512.1 million.

(2) 

As part of the Consent Order, the Bank Supervisory Authorities require the Bank to maintain a tier 1 leverage capital ratio of not less than 8.0% and a total risk-based capital ratio of not less than 11.0%. The Bank Supervisory Authorities do not have a specific tier 1 risk-based requirement; the table assumes an 8% requirement consistent with tier 1 leverage capital ratio. See note 20 of the Notes to Consolidated Financial Statements for a reconciliationdetails of totalminimum capital under GAAP and each of tangible capital, core capital, Tier 1 risked-based capital and total risk-based capital.

requirements.
(3) 

Pro forma amounts and percentages assume net proceeds are invested in assets that carry a 20% risk-weighting.

(4)Assumes a number of shares of common stock equal to 3% of the shares of common stock to be sold in the offering will be purchased for grant by one or more stock-based benefit plans in open market purchases. The dollar amount of common stock to be purchased is based on the $10.00 per share subscription price in the offering and represents unearned compensation. This amount does not reflect possible increases or decreases in the value of common stock relative to the subscription price in the offering. As Entegra accrues compensation expense to reflect the vesting of shares pursuant to the stock-based benefit plans, the credit to equity will be offset by a charge to noninterest expense. Implementation of the stock stock-based benefit plans will require shareholder approval. The funds to be used by the stock-based benefit plans will be provided by Entegra.

CAPITALIZATION

The following table presents our historical consolidated capitalization at MarchDecember 31, 20112013 and our pro forma consolidated capitalization after giving effect to the conversion and the offering, based upon the assumptions set forth in the “Pro Forma Data” section.

    As of March 31, 2011     As of December 31, 2013 
  Actual, as of
March  31, 2011
 Minimum
4,250,000
Price of
$10.00
per share
 Midpoint
5,000,000
Price of
$10.00
per share
 Maximum
5,750,000
Price of
$10.00
per share
 Maximum
as Adjusted
6,612,500
Price of
$10.00
per share
 
(Dollars in thousands)            

Shares Sold in Offering:

        Actual, as of
December 31,
2013
 Minimum
3,655,000
Price of
$10.00
per share
 Midpoint
4,300,000
Price of
$10.00
per share
 Maximum
4,945,000
Price of
$10.00
per share
 Maximum
as Adjusted
5,686,750
Price of
$10.00

per share
 

Deposits(1)

  $782,135   $782,135   $782,135   $782,135   $782,135    $684,226   $684,226   $684,226   $684,226   $684,226  

Borrowings

   80,333    80,333    80,333    80,333    80,333     54,433   54,433   54,433   54,433   54,433  
                  

 

  

 

  

 

  

 

  

 

 

Total deposits and borrowed funds

  $862,468   $862,468   $862,468   $862,468   $862,468    $738,659   $738,659   $738,659   $738,659   $738,659  
                  

 

  

 

  

 

  

 

  

 

 

Shareholders’ equity:

            

Preferred stock, no par value, 10,000,000 shares authorized; none issued or outstanding

  $—     $—     $—     $—     $—    

Common stock, no par value, 50,000,000 shares authorized; assuming shares outstanding shown

  $—     $43   $50   $58   $66  

Common stock, no par value, 50,000,000 shares authorized; assuming shares outstanding shown (2)

   —      —      —      —      —    

Additional paid-in capital

   —      39,787    46,998    54,210    62,502     —      35,077    41,450    47,824    55,153  

Retained earnings

   56,559    56,559    56,559    56,559    56,559     39,994    39,994    39,994    39,994    39,994  

Accumulated other comprehensive income (loss)

   (229  (229  (229  (229  (229   (7,476  (7,476  (7,476  (7,476  (7,476

Common stock acquired by stock-based

benefit plans (2)

   —      (1,097  (1,290  (1,484  (1,706
                  

 

  

 

  

 

  

 

  

 

 

Total shareholders’ equity

  $56,330   $96,159   $103,378   $110,597   $118,898    $32,518   $66,498   $72,678   $78,858   $85,965  
                  

 

  

 

  

 

  

 

  

 

 

Total shareholder’s equity as % of pro forma assets

   6.04  9.89  10.55  11.20  11.94   4.14  8.12  8.81  9.49  10.26

 

(1) 

Does not reflect any reduction in deposits caused by withdrawals for purchase of shares in the offering.

No effect has been given to the issuance of additional shares of common stock pursuant to one or more stock-based benefit plans. If these plans are implemented within 12 months following the completion of the stock offering, an amount up to 7% and 3% of the shares of common stock sold in the offering will be reserved for issuance upon the exercise of stock options and for issuance as restricted stock awards, respectively. See “Management of Entegra Financial Corp.”
(2)Assumes a number of shares of common stock equal to 3% of the shares of common stock to be sold in the offering will be purchased for grant by one or more stock-based benefit plans in open market purchases. The dollar amount of common stock to be purchased is based on the $10.00 per share subscription price in the offering and represents unearned compensation. This amount does not reflect possible increases or decreases in the value of common stock relative to the subscription price in the offering. As Entegra accrues compensation expense to reflect the vesting of shares pursuant to the stock-based benefit plans, the credit to equity will be offset by a charge to noninterest expense. Implementation of the stock stock-based benefit plans will require shareholder approval. The funds to be used by the stock-based benefit plans will be provided by Entegra.

PRO FORMA DATA

The following tables summarize our historical data and pro forma data at and for the three months ended March 31, 2011, and at and for the year ended December 31, 2010.2013. This information is based on assumptions set forth below and in the

table, and should not be used as a basis for projections of market value of the shares of common stock following the conversion and offering.

The net proceeds in the tables are based upon the following assumptions:

 

75% of the shares of common stock will be sold in the subscription offering, 25% of the shares will be sold in the community offering, and no shares will be sold in a syndicated offering;

150,000

220,000 shares of common stock will be purchased by our executivedirectors, officers and directors;

employees or members of their immediate families;

 

Raymond James & Associates, Inc.Sandler O’Neill will receive a fee equal to (a) 6.0%(i) 1.0% of the aggregate dollar amount of common stock sold to investors other than eligible depositors and borrowerspurchase price of the Bank, plus (b) 1.5%shares sold in the subscription offering, and (ii) 1.75% of the aggregate dollar amount of common stock sold to eligible depositors and borrowerspurchase price of the Bank; providedshares sold in the community offering, except that no commission shallfee will be charged forpaid with respect to shares sold topurchased by our directors, officers directors,and employees or employee benefit plans (if any)members of the Bank;their immediate families; and

 

Total expenses of the offering, other than fees and expenses to be paid to Raymond James & Associates, Inc.,Sandler O’Neill, are estimated to be $949,325.

$1,010,000.

We calculated pro forma consolidated net income for the three months ended March 31, 2011 and at and for the year ended December 31, 2010,2013, as if the estimated net proceeds we received had been invested at an assumed interest rate of 2.24% (1.36%1.75% (1.23% on an after-tax basis). This represents the yield on the five-year U.S. Treasury Note as of MarchDecember 31, 2011,2013, which, in light of current market interest rates, we consider to more accurately reflect the pro forma reinvestment rate than the arithmetic average of the weighted average yield earned on our interest-earning assets and the weighted average rate paid on our deposits.

We calculated historical and pro forma per share amounts by dividing historical and pro forma amounts of consolidated net income and shareholders’ equity by the indicated number of shares of common stock. We computed per share amounts for each period as if the shares of common stock were outstanding at the beginning of each period, but we did not adjust per share historical or pro forma shareholders’ equity to reflect the earnings on the estimated net proceeds.

The pro forma tables give effect to the implementation of one or more stock-based benefit plans. Subject to the receipt of shareholder approval, we have assumed that the stock-based benefit plans will acquire for restricted stock awards a number of shares of common stock equal to 3% of our outstanding shares of common stock at the same price for which they were sold in the stock offering. We assume that shares of common stock are granted under the plans in awards that vest over a five-year period. We have also assumed that the stock-based benefit plans will grant options to acquire shares of common stock equal to 7% of our outstanding shares of common stock sold in the stock offering. In preparing the tables below, we assumed that shareholder approval was obtained, that the exercise price of the stock options and the market price of the stock at the date of grant were $10.00 per share and that the stock options had a term of ten years and vested over five years. We applied the Black-Scholes option pricing model to estimate a grant-date fair value of $3.33 for each option. In addition

to the terms of the options described above, the Black-Scholes option pricing model assumed an estimated volatility rate of 15.8% for the shares of common stock, a dividend yield of 0%, an expected option life of 10 years and a risk-free interest rate of 3.04%. Because there is currently no market for our shares of common stock, the assumed expected volatility is based on the SNL Securities index for all publicly-traded thrift institutions and their holding companies. The dividend yield reflects the average dividend yield for publicly traded thrifts.

We may grant options and award shares of common stock under one or more stock-based benefit plans in excess of 7% and 3%, respectively, of our total outstanding shares if the stock-based benefit plans are adopted more than one year following the conversion and the offering. In addition, we may grant options and award shares that vest sooner than over a five-year period if the stock-based benefit plans are adopted more than one year following the conversion and the offering.

As discussed under “How We Intend to Use the Proceeds from the Offering” on page, we intend to contribute up to 90%85% of the net proceeds from the offering to the Bank, and we will retain the remainder of the net proceeds. We will seek regulatory approval to use a portion of the net proceeds to pay the deferred dividends and applicable interest on our trust preferred securities, and will retain the rest of the proceeds for future use.

The pro forma table does not give effect to:

 

withdrawals from deposit accounts for the purpose of purchasing shares of common stock in the offering;

 

our results of operations after the offering; or

 

changes in the market price of the shares of common stock after the offering.

The following pro forma information may not represent the financial effects of the offering at the date on which the offering actually occurs and you should not use the table to indicate future results of operations. Pro forma shareholders’ equity represents the difference between the stated amount of our assets and liabilities, computed in accordance with GAAP. We did not increase or decrease shareholders’ equity to reflect the difference between the carrying value of loans and other assets and their market values. Pro forma shareholders’ equity is not intended to represent the fair market value of the shares of common stock and may be different than the amounts that would be available for distribution to shareholders if we liquidated. Pro forma shareholders’ equity does not give effect to the impact of intangible assets, the liquidation account we will establish in the conversion or tax bad debt reserves in the unlikely event we are liquidated.

  At or for the three months ended March 31, 2011   At or for the year ended December 31, 2013 
  Minimum
4,250,000
$10.00
per share
 Midpoint
5,000,000
$10.00
per share
 Maximum
5,750,000
$10.00
per share
 Maximum as
Adjusted
6,612,500
$10.00
per share
   Minimum
3,655,000
$10.00
per share
 Midpoint
4,300,000
$10.00
per share
 Maximum
4,945,000
$10.00
per share
 Adjusted
Maximum
5,686,750
$10.00
per share(1)
 
  (Dollars in thousands, except per share amounts)   (Dollars in thousands, except per share amounts) 

Gross proceeds of offering

  $42,500   $50,000   $57,500   $66,125    $36,550   $43,000   $49,450   $56,867  

Less expenses

   (2,671  (2,952  (3,233  (3,557   (1,473 (1,550 (1,626 (1,714
               

 

  

 

  

 

  

 

 

Estimated net investable proceeds

  $35,077   $41,450   $47,824   $55,153  

Less: Common stock purchased by Recog. Plans

   (1,097  (1,290  (1,484  (1,706
  

 

  

 

  

 

  

 

 

Estimated net cash proceeds

  $39,829   $47,048   $54,267   $62,568    $33,981   $40,160   $46,340   $53,447  
               

 

  

 

  

 

  

 

 

For the three months ended March 31, 2011

     

For the year ended December 31, 2013

     

Consolidated net (loss)

          

Historical

  ($8,897 ($8,897 ($8,897 ($8,897  ($415 ($415 ($415 ($415

Pro forma income on net proceeds

   135    160    184    212     416    492    568    655  

Pro forma RRP adjustment(2)

   (154  (181  (208  (239

Pro forma options adjustment (New Options)(3)

   (158  (185  (213  (245
               

 

  

 

  

 

  

 

 

Pro forma net (loss)

  ($8,764 ($8,738 ($8,713 ($8,687   (311  (289  (268  (244
               

 

  

 

  

 

  

 

 

Per share net (loss)

          

Historical

  ($2.09 ($1.78 ($1.55 ($1.34  ($0.11 ($0.10 ($0.08 ($0.07

Pro forma income on net proceeds

   0.03    0.03    0.03    0.03     0.11    0.11    0.11    0.12  

Pro forma RPP adjustment

   (0.04  (0.04  (0.04  (0.04

Pro forma options adjustment (New Options)

   (0.04  (0.04  (0.04  (0.04
               

 

  

 

  

 

  

 

 

Pro forma net (loss) per share

  ($2.06 ($1.75 ($1.52 ($1.31  ($0.08 ($0.07 ($0.05 ($0.03
               

 

  

 

  

 

  

 

 

Offering price as a multiple of pro forma net earnings (loss) per share

   NM    NM    NM    NM     NM    NM    NM    NM  

Number of shares outstanding for pro forma net income per share calculation

   4,250,000    5,000,000    5,750,000    6,612,500     3,655,000    4,300,000    4,945,000    5,686,750  

At March 31, 2011

     

Shareholders’ equity:

     

Historical

  $56,330   $56,330   $56,330   $56,330  

Estimated net proceeds

   39,829    47,048    54,267    62,568  
             

Pro forma shareholders’ equity

  $96,159   $103,378   $110,597   $118,898  
             

Shareholders’ equity per share

     

Historical

  $13.25   $11.27   $9.79   $8.52  

Estimated net proceeds

   9.37    9.42    9.44    9.46  
             

Pro forma shareholders’ equity per share

  $22.62   $20.69   $19.23   $17.98  
             

Offering price as a percentage of pro forma shareholders’ equity per share

   44.21  48.33  52.00  55.62

Number of shares outstanding for pro forma book value per share calculations

   4,250,000    5,000,000    5,750,000    6,612,500  

   At or for the year ended December 31, 2010 
   Minimum
4,250,000
$10.00
per share
  Midpoint
5,000,000
$10.00
per share
  Maximum
5,750,000
$10.00
per share
  Max, As Adj.
6,612,500
$10.00
per share
 
   (Dollars in thousands, except per share amounts) 

Gross Proceeds of Offering

  $42,500   $50,000   $57,500   $66,125  

Less Expenses

   (2,671  (2,952  (3,233  (3,557
                 

Estimated net cash proceeds

  $39,829   $47,048   $54,267   $62,568  
                 

For the Year Ended December 31, 2010

     

Consolidated net income

     

Historical

  ($14,258 ($14,258 ($14,258 ($14,258

Pro forma income on net proceeds

   540    638    735    848  
                 

Pro forma net income

  ($13,718 ($13,620 ($13,523 ($13,410
                 

Per share net income

     

Historical

  ($3.36 ($2.85 ($2.48 ($2.16

Pro forma income on net proceeds

   0.13    0.13    0.13    0.13  
                 

Pro forma net income per share

  ($3.23 ($2.72 ($2.35 ($2.03
                 

Offering price as a multiple of pro forma net earnings per share

   NM    NM    NM    NM  

Number of shares outstanding for pro forma net Income per share calculation

   4,250,000    5,000,000    5,750,000    6,612,500  

At December 31, 2010

     

Shareholders’ equity:

     

Historical

  $65,968   $65,968   $65,968   $65,968  

Estimated net proceeds

   39,829    47,048    54,267    62,568  
                 

Pro forma shareholders’ equity

  $105,797   $113,016   $120,235   $128,536  
                 

Shareholders’ equity per share

     

Historical

  $15.52   $13.19   $11.47   $9.98  

Estimated net proceeds

   9.37    9.41    9.44    9.46  
                 

Pro forma shareholders’ equity per share

  $24.89   $22.60   $20.91   $19.44�� 
                 

Offering price as a percentage of pro forma shareholders’ equity per share

   40.18  44.25  47.82  51.44

Number of shares outstanding for pro forma book value per share calculations

   4,250,000    5,000,000    5,750,000    6,612,500  
   At or for the year ended December 31, 2013 
   Minimum
3,655,000
$10.00
per share
  Midpoint
4,300,000
$10.00
per share
  Maximum
4,945,000
$10.00
per share
  Adjusted
Maximum
5,686,750
$10.00
per share(1)
 
   (Dollars in thousands, except per share amounts) 

At December 31, 2013

     

Shareholders’ equity:

     

Historical

  $32,518   $32,518   $32,518   $32,518  

Estimated net proceeds

   35,077    41,450    47,824    55,153  

Less: Common stock acquired by stock-based benefit plans

   (1,097  (1,290  (1,484  (1,706
  

 

 

  

 

 

  

 

 

  

 

 

 

Pro forma shareholders’ equity

  $66,499   $72,678   $78,858   $85,965  
  

 

 

  

 

 

  

 

 

  

 

 

 

Shareholders’ equity per share

     

Historical

  $8.90   $7.56   $6.58   $5.72  

Estimated net proceeds

   9.60    9.64    9.67    9.70  

Less: Common stock acquired by stock-based benefit plans

   (0.30  (0.30  (0.30  (0.30
  

 

 

  

 

 

  

 

 

  

 

 

 

Pro forma shareholders’ equity per share

  $18.20   $16.90   $15.95   $15.12  
  

 

 

  

 

 

  

 

 

  

 

 

 

Offering price as a percentage of pro forma shareholders’ equity per share

   54.95  59.17  62.70  66.14

Number of shares outstanding for pro forma book value per share calculations

   3,655,000    4,300,000    4,945,000    5,686,750  

(1)As adjusted to give effect to an increase in the number of shares which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.
(2)

If approved by Entegra shareholders, one or more stock-based benefit plans may purchase an aggregate number of shares of common stock equal to 3% of the shares to be sold in the offering (or possibly a greater number of shares if the plan is implemented more than one year after completion of the conversion). Shareholder approval of the stock-based benefit plans, and purchases by the plan may not occur earlier than six months after the completion of the conversion. The shares may be acquired directly from Entegra or through open market purchases. The funds to be used by the stock-based benefit plans to purchase the shares will be provided by Entegra. The table assumes that (i) the stock-based benefit plans acquire the shares through open market purchases at $10.00 per share, (ii) 20% of the amount contributed to the stock-

based benefit plans is amortized as an expense during the year, and (iii) the stock-based benefit plans expense reflects an effective tax rate of 30%. Assuming shareholder approval of the stock-based benefit plans and that shares of common stock equal to 3% of the shares sold in the offering are awarded through the use of authorized but unissued shares of common stock, shareholders would have their ownership and voting interests diluted by approximately 2.9%.
(3)If approved by Entegra shareholders, one or more stock-based benefit plans may grant options to acquire an aggregate number of shares of common stock equal to 7% of the shares to be sold in the offering (or possibly a greater number of shares if the plan is implemented more than one year after completion of the conversion). Shareholder approval of the stock-based benefit plans may not occur earlier than six months after the completion of the conversion. In calculating the pro forma effect of the stock options to be granted under stock-based benefit plans, it is assumed that the exercise price of the stock options and the trading price of the common stock at the date of grant were $10.00 per share, the estimated grant-date fair value determined using the Black-Scholes option pricing model was $3.33 per option, the aggregate grant-date fair value of the stock options was amortized to expense on a straight-line basis over a five-year option vesting period and 25% of the amortization expense (or the assumed portion relating to non-qualified options granted to directors) resulted in a tax benefit using an assumed tax rate of 30%. The actual expense of the stock options to be granted under the stock-based benefit plans will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used in the option pricing model ultimately adopted. Under the above assumptions, the adoption of the stock-based benefit plans will result in no additional shares under the treasury stock method for purposes of calculating earnings per share. There can be no assurance that the actual exercise price of the stock options will be equal to the $10.00 price per share. If a portion of the shares to satisfy the exercise of options under the stock-based benefit plans is obtained from the issuance of authorized but unissued shares, our net income per share and shareholders’ equity per share would decrease. Assuming shareholder approval of the stock-based benefit plans and that shares of common stock used to fund stock options (equal to 7% of the shares sold in the offering) are awarded through the use of authorized but unissued shares of common stock, shareholders would have their ownership and voting interests diluted by approximately 6.5%.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF CONSOLIDATEDOUR BUSINESS

FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe Companies

Entegra.This offering is being made by Macon Financial,Entegra, a newly formed North Carolina corporation. Uponcorporation organized in 2011 as “Macon Financial Corp.” and renamed “Entegra Financial Corp.” in 2014. Entegra will own all of the outstanding shares of common stock of Macon Bank upon completion of this offering and the mutual-to-stock conversion Bancorp, the mutual holding company parent of the Bank, will be merged into Macon Financial, with Macon Financial as the surviving entity, whereby the Bank will become a wholly-owned subsidiary of Macon Financial. Accordingly, this section references the consolidated financial condition and resultsBancorp. Other than matters of operations of an organizational nature, Entegra has not engaged in any business to date.

Macon Bancorp and Macon Bank.

This section is intended to help potential investors understand our financial performance through a discussion of the factors affecting our consolidated financial condition at March 31, 2011, December 31, 2010 and 2009, and our consolidated results of operations for the three months ended March 31, 2011 and 2010, and the years ended December 31, 2010, and 2009. This section should be read in conjunction with the Consolidated Financial Statements and Notes to the Consolidated Financial Statements that appear elsewhere in this prospectus.

Our Business

Bancorp.Macon Bancorp is a North Carolina chartered mutual holding company headquartered in Franklin, North Carolina. It was organized in 1997, when the Bank converted from a mutual savings bank to a stock savings bank, and owns 100% of the outstanding shares of common stock of the Bank. Bancorp also has one non-bank subsidiary, Macon Capital Trust I, a Delaware statutory trust, formed in 2003 to facilitate the issuance of trust preferred securities. On a consolidated basis, as of December 31, 2013, Bancorp had total assets of $784.6 million, total loans of $521.9 million, total deposits of $684.2 million and total equity of $32.5 million. As a mutual holding company, Bancorp has no shareholders and is controlled by the depositors and borrowers of the Bank.

Pursuant to the terms of our plan of conversion, Macon Bancorp will merge with and into Macon Financial,Entegra and, in doing so, will convert from a mutual form of organization to a stock form of organization. Upon the completion of the conversion, Bancorp will cease to exist, and the Bank will become a wholly-owned subsidiary of Entegra.

Macon Financial, which will be renamed “Macon Bancorp”.

Bank.Macon Bank is a North Carolina chartered stock savings bank headquartered in Franklin, North Carolina. It was organized in 1922, as a North Carolina chartered mutual savings and loan association, andassociation. In 1992, it converted to a North Carolina chartered mutual savings bank in 1992.bank. In 1997, upon the formation of Bancorp, it converted to a North Carolina chartered stock savings bank. Macon Bank has one subsidiary, Macon Services, Inc., which holds real estate for investment.

Our Executive Offices. Our executive offices are located at 220 One Center Court, Franklin, North Carolina 28734 and the telephone number at this address is (828) 524-7000. Our website address is www.maconbank.com. Information on our website is not incorporated into this prospectus and should not be considered part of this prospectus.

General

Overview. The Bank was organized as a mutual savings and loan association, or “thrift,” for the primary purpose of promoting home ownership through mortgage lending, financed by locally gathered deposits. Surviving the Great Depression of the 1930’s, we remained a single-office bank until we opened a second office in downtown Murphy, North Carolina in 1981. Between 1993 and 2002, we added eight more branches in North Carolina, including a second office in Franklin, one in each of Highlands, Brevard, Sylva, Cashiers and Arden, and two in Hendersonville. In addition to our corporate headquarters,2007, we opened two more branches in Columbus and Saluda, North Carolina.

We have 11 branches located throughout the Westernwestern North Carolina counties of Cherokee, Henderson, Jackson, Macon, Polk and Transylvania, which we consider our primary market area. Our business consists

primarily of accepting deposits from individuals and small businesses and investing those deposits, together with funds generated from operations and borrowings, primarily in loans secured by real estate, including commercial real estate loans, one- to four-family residential loans, construction loans, home equity loans and lines of credit. We also originate commercial business loans and invest in investment securities. Through our mortgage loan production operations we originate loans for sale in the secondary markets to Fannie Mae and others, generally retaining the servicing rights in order to generate cash flow,servicing income, supplement our core deposits with escrow deposits and maintain relationships with local borrowers. We offer a variety of deposit accounts, including savings accounts, certificates of deposit, money market accounts, commercial and regular checking accounts, and individual retirement accounts.

In addition to making loans within our primary market area, weWe also regularly extend loans to customers located in neighboring counties, including Buncombe, Clay, Haywood, Rutherford and RutherfordSwain in North Carolina; Rabun, Towns and Union in Georgia; and Cherokee, Greenville, Oconee, Pickens and Spartanburg in South Carolina, which we consider our secondary market area. The following table shows deposit market share within the Bank’s primary market area.

Competing Banks and Thrifts

Total

Deposit

Rank

2010

  

Institution

  Institution City  Institution
Headquarters
State
  Total
Active
Branches
2000
   Total
Active
Branches
2010
   Total  deposits
(1)

2000
(thousands)
   Total
Deposit
Market
Share
2000
(%)
  Total  deposits
(1)

2010
(thousands)
   Total
Deposit
Market
Share
2010
(%)
 
1  Macon Bank  Franklin  NC   9     11     250,605     9.4  820,204     17.4
2  

First-Citizens Bank &

Trust Co.

  Raleigh  NC   22     17     490,284     18.4  736,358     15.6
3  Wells Fargo Bank NA  Sioux Falls  SD   14     9     461,851     17.3  489,042     10.4
4  United Community Bank  Blairsville  GA   10     11     296,203     11.1  465,146     9.9
5  

Mountain 1st Bank &

Trust Co.

  Hendersonville  NC   0     6     —       0.0  435,959     9.2
6  TD Bank NA  Wilmington  DE   4     8     157,604     5.9  344,581     7.3
7  Home Trust Bank  Clyde  NC   4     3     211,025     7.9  321,634     6.8
8  RBC Bank (USA)  Raleigh  NC   10     7     313,509     11.8  245,719     5.2
9  Bank of America NA  Charlotte  NC   4     4     144,960     5.4  154,829     3.3
10  SunTrust Bank  Atlanta  GA   5     4     176,660     6.6  149,169     3.2

(1)Total deposits represent the six counties in which Macon Bank has branches.

Source: FDIC

Recent Operating Challenges and Losses.

We grew significantly in the last decade, increasing our loan portfolio from $333.5 million at December 31, 2000, to a high of $832.6 million at December 31, 2007, before declining to $690.8 million at March 31, 2011. Our construction and development loans grew from $12.2 million at December 31, 2000, to $298.3 million at December 31, 2007, before declining to $154.8 million at March 31, 2011, representing the majority of our loan growth. Many of these construction and development loans were collateralized by developments for second homes. As the national housing bubble burst, the value of the collateral for our construction and development loans and our other loans declined. The decline in real estate values and impact of the recession resulted in a significant level of loan defaults. Accordingly, our level of non-performing assets increased from $4.6 million at December 31, 2000, to $8.0 million at December 31, 2007, and to $96.7 million at March 31, 2011.

The recent increase in our level of non-performing assets resulted in large loan loss provisions, large loan losses and high REO expenses. During the three years ended December 31, 2010 and the quarter ended March 31, 2011, we recorded aggregate net losses of $24.5million. These losses were driven by cumulative provisions for loan losses of $56.8 million over the same period. Our total equity has decreased from $88.7 million at December 31, 2008 to $56.3 million at March 31, 2011. The increase in non-performing assets has also negatively impacted our operations by reducing our level of earning assets and increasing our level of operating expenses to manage these problem assets. Furthermore, due to our increased risk profile, we increased our level of liquidity, which effectively reduced our net interest income.

As a result of the increase in our non-performing assets, our recent losses, the decrease in our equity capital, and other factors, we have received an increased level of scrutiny from our regulators. As described in the section entitled “– Memoranda of Understanding” on page, the Bank and Bancorp have each entered into an MOU, with their respective banking regulators. The Bank has agreed to, among other things, increase its regulatory capital, reduce lines of credit which are subject to adverse classification, reduce its reliance on volatile liabilities to fund longer term assets, establish and maintain an adequate allowance for loan losses, and establish an enhanced loan loss reserve policy. In addition, the Bank must obtain regulatory approval prior to paying any dividends to Bancorp. Bancorp has agreed to, among other things, not declare or pay any dividends without prior regulatory approval and not take dividends from or otherwise reduce the capital of

the Bank without prior regulatory approval. The Bank MOU requires it to maintain a leverage ratio of 8.0% and a total risk-based capital ratio of 12.0%. The Bank’s capital ratios were below those mandated levels at March 31, 2011.

Operating Strategy and Reasons for the Conversion.

We have developed an operating strategy to reposition the Bank so that it may return to profitability and explore opportunities for growth. We need a significant amount of capital to execute this strategy, and cannot raise this level of capital as a mutual financial institution. We have considered current market conditions and the amount of capital needed in deciding to conduct the conversion at this time, and have established the following three-part operating strategy in order to effectively and efficiently use the proceeds from the offering.

Address Current Challenges.Our first priority is to reduce our level of non-performing and classified assets both in the aggregate and as a percentage of total assets. We also want to become in full compliance with the Memoranda as quickly as possible.

Improve asset quality. As described in the section entitled “” on page, our non-performing assets have increased during the current adverse credit cycle and were $96.7 million or 10.36% of our total assets at March 31, 2011. During 2010, management appointed an experienced special assets manager and reassigned employees as support staff to increase collection efforts, expedite foreclosure actions, and liquidate real estate owned. We are aggressively addressing our level of non-performing assets through write-downs, collections, modifications and sales of non-performing loans and the sale of properties once they become REO. For the years 2007 through 2010 and through March 31, 2011, we have recorded cumulative net charge-offs of approximately $46.0 million. We are taking proactive steps to resolve our non-performing loans, including negotiating repayment plans, loan modifications and loan extensions with our borrowers when appropriate, working with developers to promote discounted sales events to increase sales and accepting short payoffs on delinquent loans, particularly when such payoffs result in a smaller loss to us than foreclosure. In late 2010, management increased the frequency for problem loan appraisals to six to 12 month intervals, from 12 to 24 months, which resulted in additional loan write-downs. In 2010 and the first quarter of 2011, the Bank liquidated $28.7 million in real estate owned based on loan values at the time of foreclosure, realizing $15.9 million in net proceeds or 55.3% of the foreclosed loan balances. The Bank’s current real estate owned portfolio is comparably valued at 59.8% of loan value at the time of foreclosure. In addition to continuing to pursue the above steps to improve our asset quality, we may consider bulk sales of non-performing assets in order to expedite our strategy for improving asset quality, although we have no firm plans to do so at this time.

We have taken several actions to improve our credit administration practices and reduce the risk in our loan portfolio. We also added experienced personnel, including Gary Brown who was appointed Chief Credit Officer in February, 2011, to our loan department to enable us to better identify problem loans in a timely manner and reduce our exposure to a further deterioration in asset quality. Also, since 2008, we have regularly engaged an independent loan review consulting firm to perform a review of our loan portfolio. The Bank has added new support systems that have improved our underwriting global cash flow analysis, portfolio credit risk assessment, risk grade migration, and loan loss allowance calculation. We have made an effort to reduce our exposure to riskier types of loan structures and collateral both through asking borrowers to pledge additional collateral and by reducing certain segments of our loan portfolio. We have reduced our construction and other construction and land development loan portfolio from $298.3 million at December 31, 2007 to $154.8 million at March 31, 2011.

Compliance with Memoranda of Understanding. As described in the section entitled “– Memoranda of Understanding” on page , we have taken and continue to take prompt and aggressive action to respond to the issues raised in the Memoranda, including submitting quarterly reports to our banking regulators. Except for the elevated capital requirements, which we anticipate we will satisfy once the conversion is completed, we believe that we are generally in compliance with the Memoranda. However, the Memoranda will each remain in effect until modified, terminated, lifted, suspended or set aside by the applicable banking regulators, and no assurance can be given as to the time that either of the Memoranda will be terminated. While we will seek to demonstrate as soon as possible to our banking regulators that we have fully complied with the requirements of the Memoranda and that they should be terminated, we expect that the Memoranda will remain in effect for the immediate future.

Restore Profitability.Until the current adverse credit cycle, the Bank enjoyed a long history of strong earnings, continuously reporting a profit every year from 1982 through 2008. While we expect to record losses as we continue to resolve non-performing assets, we are focused on returning to profitability.

Improve our net interest margin.Net interest income is our largest source of revenue. Our net interest margin has declined over the past four years. The increase in non-earning assets, especially non-accrual loans and real estate owned, has factored into this decline. We have also maintained an elevated level of liquidity as a result of reduced loan demand in recent periods, which has contributed to our reduced net interest margin. We believe that our net interest margin will improve as we resolve non-performing assets and invest those proceeds into earning assets. Additionally, we took the step of prepaying $42.5 million of high-cost FHLB advances in the first quarter of 2011, which we anticipate will result in an increase in net interest income. Finally, we are working to further improve our base of core deposits and lower our cost of funds.

Increase noninterest income.The majority of the Bank’s noninterest income is the result of our mortgage banking business and customer service fees. We believe that we have the opportunity to increase noninterest income by adding additional lines of business. We have plans to become an active lender of SBA loans and would hope to sell the SBA guaranteed portion of those loans at a gain. We also believe that expanding our focus on small business and private banking customers will increase our opportunities to earn noninterest income.

Continue history of operating expense discipline. Our core efficiency ratio for the quarter ended March 31, 2011 was 67.7%, reflecting the increased expense related to resolving non-performing assets. Historically we have operated more efficiently on a core basis. For the five years 2006 through 2010, our average core efficiency ratio was under 60.0%. This success is the result of a disciplined approach to spending. We have also leveraged technology to drive efficiency throughout our organization. We recently renegotiated our data processing contract and are planning to convert to a debit card processing platform, which we anticipate will result in substantial savings in 2011, and in future years. While our level of core operating expenses will increase as a public company and we will continue to incur expenses to resolve non-performing assets, we are committed to carefully managing expenses.

Increase Small Business and Private Banking Customer Focus and Explore Growth Opportunities.As we implement our operating strategy, we will work to diversify our customer base, and explore various growth opportunities, including those described below. We have no current arrangements or agreements concerning any specific growth opportunities at this time.

Increase small business and private banking customer focus.We believe that we can enhance our franchise value by increasing our focus on small business and private banking customers. We believe that small business and private banking customers value the personalized service that has been our hallmark. These customers also present attractive loan and deposit opportunities that will allow us to diversify our loan portfolio and further increase our level of core deposits. The new members of our management team have substantial experience targeting these types of banking customers. We have enhanced training for our existing lenders in commercial and industrial, and SBA lending. Additionally, we will hire lenders, relationship officers and credit officers experienced in these areas as we grow these lines of business.

Expand into larger, contiguous markets. We are located in close proximity to a number of larger markets with attractive growth opportunities. Many of these markets have a high number of attractive small business and private banking customers. In addition to diversifying our customer mix, these markets would provide geographic diversification for our lending collateral. For instance, we have existing branch offices located near Asheville, North Carolina (30 minutes traveling time along I-26), northwest of Spartanburg, South Carolina (30 minutes traveling time along I-26); and northwest of Greenville, South Carolina (1 hour traveling time along I-26 and I-85). We are also located near Atlanta, Georgia (2 hours), Chattanooga, Tennessee (1.5 hours), Knoxville, Tennessee (2 hours) and Johnson City, Tennessee (1.5 hours).

Capitalize on market disruption.We anticipate that both current and expected consolidation within the banking industry and the increasing number of troubled banks will give rise to attractive growth opportunities. As a result of mergers between banks and recent bank failures, we believe that many customers and bankers may become dissatisfied with their new bank. Many banks do not have sufficient capital to make new loans and are having to cut back on customer service as they focus on managing their problems. We believe that these challenges will result in customer dissatisfaction, which will present us with a better opportunity to do business with these customers. Additionally, we believe that bankers will be dissatisfied with their current employers, and we will have the opportunity to hire away experienced personnel. We believe that we have the appropriate infrastructure and management depth to accommodate future growth, including our use of technology, mortgage loan production operations, call center, and corporate headquarters with centralized loan processing and training facilities.

Organic growth.We are well-established in our primary market area, leading our competitors in market share as of June 30, 2010, according to the most recent publicly reported figures. We believe that this solid market position will allow us to continue to increase our market share. We also believe our core strength in our primary market will enable us to grow into adjacent areas. We have experience opening offices in new markets, having successfully entered new markets in the 1990’s

and 2000’s. We are already making loans in a number of adjacent counties, some of which have similar demographics to our primary market area. We will consider opportunities as they arise to open loan production offices or branch offices in adjacent markets, particularly markets in which we have lending experience.

Future acquisition opportunities. While we are currently focused on repositioning the Bank in the near term, we expect to be able to consider acquisition opportunities in the future. Smaller banks may struggle to support the compliance costs resulting from the adoption of last year’s Dodd-Frank Act. Additionally, smaller banks have fewer ways to raise the capital they need to address current problems and support growth. We believe that these two factors will lead many smaller banks to seek a merger partner. Additionally, we expect to see other banks sell branches either to shrink their balance sheet or to focus on core markets. We will carefully evaluate any future acquisition opportunity to understand the potential impacts, both positive and negative, along with the risks of any transaction.

For further information about our reasons for the conversion and offering, please see “– Reasons for the Conversion” on page .

Overview

Our results of operations depend primarily on our net interest income, which is the difference between the interest income we earn on our loan and investment portfolios and the interest expense we incur on our deposits and borrowings. Results of operations are also affected by service charges and other fees, provisions for loan losses, gains on sales of loans originated for sale and other income. Our noninterest expense consists primarily of salaries and employee benefits, net occupancy and equipment expense, data processing, professional and services fees, FDIC deposit insurance and other REO expense.

As evidenced by the current economic recession, our results of operations are significantly affected by general economic and competitive conditions in our market areas and nationally, as well as changes in interest rates, sources of funding, government policies and actions of regulatory authorities. Future changes in applicable laws, regulations or government policies may materially affect our financial condition and results of operations.

We do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on his or her loan, resulting in an increased principal balance during the life of the loan. We do not offer “sub-prime loans,”i.e., loans that are made with low down-payments to borrowers that have had payment delinquencies, previous loan charge-offs, judgments and bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios.

Historically, the majority of the loans that we originate for sale in secondary markets have been underwritten and sold to Fannie Mae. Since 2003, approximately 93% of all loans sold by us have been sold to Fannie Mae. We originated a small number of “no documentation” and “Alt-A” loans between 2003 and 2005. In 2009, we repurchased one permanent loan at a loss of $50,000, and one construction-permanent loan without loss. Otherwise, we have not repurchased any of our loans. Of the $301.6 million in loans that we serviced for third parties as of March 31, 2011, approximately $5.3 million, or 1.76%, were past due greater than 90 days.

At March 31, 2011, approximately $506.8 million, or 73.4%, of our total loan portfolio is to borrowers resident within our primary market area, and $631.8 million, or 91.5%, of our loans are to borrowers resident in North Carolina, Georgia, or South Carolina. Approximately $651.3 million, or 97.0%, of our total real estate collateral is located within our primary market area. Our largest single loan is a performing $10.6 million loan secured by multi-use residential and commercial properties. We have 27 loan participations purchased from third parties for a total of $16.7 million, including a $2.7 million commercial real estate loan which is on non-accrual status.

At March 31, 2011, the fair value of our investment portfolio totaled $154.8 million, or 16.6%, of our total assets and represented the second largest component of our interest-earning assets. Our portfolio consists primarily of U.S. Government agency securities, agency mortgage-backed securities, collateralized mortgage obligations, and municipal securities. Our U.S. Government structured obligations consisted solely of Fannie Mae and Freddie Mac securities, are all callable, and include a step-up interest rate feature should the issuer not call the security. All of our securities are classified as “available-for-sale.”

At March 31, 2011, deposits totaled $782.1 million. Our primary source of deposits are from customers within our primary market area, supplemented by brokered and internet deposits. We have consistently focused on building broader customer relationships and targeting small business customers to increase our core deposits. We offer a variety of deposit

accounts with a range of interest rates and terms. Our deposit accounts consist of savings accounts, certificates of deposit, money market accounts, commercial and regular checking accounts and individual retirement accounts. Interest rates paid, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market interest rates, liquidity requirements, and our deposit growth goals. In order to lower our interest expense, we reduced our brokered deposits to $120.2 million at March 31, 2011, or 15.4% of total deposits, from $152.9 million, or 19.2%, of total deposits at December 31, 2010.

Anticipated Increase in Noninterest Expense

Following the completion of the offering, we anticipate that salary, professional fees, and miscellaneous noninterest expense will increase as a result of the increased costs associated with managing a public company. Also, following the offering, we intend to adopt one or more stock-based benefit plans that will provide for grants of stock options and restricted stock awards to our directors, officers and other employees. Any such stock-based benefit plans will be established no sooner than 12 months after the offering closes, and will require the approval of our shareholders by a majority of votes cast.

Critical Accounting Policies

We consider accounting policies that require management to exercise significant judgment or discretion or make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income, to be critical accounting policies. We consider the following to be our critical accounting policies.

Allowance for Loan Losses. We maintain an allowance for loan losses at an amount estimated to equal all credit losses inherent in our loan portfolio that are both probable and reasonable to estimate at a balance sheet date. Management’s determination of the adequacy of the allowance is based on evaluations, at least quarterly, of the loan portfolio and other relevant factors. However, this evaluation is inherently subjective, as it requires an estimate of the loss content for each risk rating and for each impaired loan, an estimate of the amounts and timing of expected future cash flows, and an estimate of the value of collateral. Based on our estimate of the level of allowance for loan losses required, we record a provision for loan losses to maintain the allowance for loan losses at an appropriate level.

All loan losses are charged to the allowance for loan losses and all recoveries are credited to it. Additions to the allowance for loan losses are provided by charges to income based on various factors which in our judgment deserve current recognition in estimating probable losses. When any loan or portion thereof is classified Doubtful or Loss, the loan will be charged down or charged off against the allowance for loan losses. Loans are deemed Doubtful or Loss based on a variety of credit, collateral, documentation and other issues. When collateral is foreclosed or repossessed, any principal charge-off related to that transaction, based upon the most current appraisal or evaluation, along with estimated sales expenses is taken at that time.

The determination of the allowance for loan losses is based on management’s current judgments about the loan portfolio credit quality and management’s consideration of all known relevant internal and external factors that affect loan collectability, as of the reporting date. We cannot predict with certainty the amount of loan charge-offs that will be incurred and, as was the case in the first quarter of 2011, we may make a business decision to accept a short sale in order to move a loan out of the portfolio. We provide both general and specific reserves. We value non-homogeneous loans in our portfolio for specific impairment. We value homogeneous loans based on our historical experience within individual loan types. Qualitative/Environmental factors in our loan loss allowance are used to measure unimpaired non-qualified loans and classified loans are adjusted to provide a measure for this market weakness. We have modified loans and classified them as troubled debt restructurings (“TDRs”) when the restructuring meets defined criteria. All TDRs are included in our impaired loans. In addition, our various regulatory agencies, as part of their examination processes, periodically review our allowance for loan losses. Such agencies may require that we recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination.

Troubled Debt Restructurings (TDRs). In accordance with accounting standards, we classify loans as TDRs when certain modifications are made to the loan terms and concessions are granted to the borrowers due to their financial difficulty. Our practice is to only restructure loans for borrowers in financial difficulty that have designed a viable business plan to fully pay off all outstanding debt, interest and fees, either by generating additional income from the business or through liquidation of assets. Generally, these loans are restructured to provide the borrower additional time to execute its business plan. With respect to TDRs, we grant concessions by reducing the stated interest rate for a specific time period, generally shorter than the remaining original life of the debt, or extending the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk. TDRs with an extended maturity date generally include periods where payments are made on an interest-only or capitalized interest basis, and are formally recorded in forbearance agreements. In certain cases, these

extended payment terms are also combined with a reduction of the stated interest rate. In situations where a TDR is unsuccessful and the borrower is unable to satisfy the terms of the restructured agreement, the loan is placed on non-accrual status and is written down to the underlying collateral value.

Impaired loans.A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. All TDRs are classified as impaired loans.

Other-Than-Temporary Impairment.In estimating other-than-temporary impairment of investment securities, securities are evaluated periodically, and at least quarterly, to determine whether a decline in their value is other than temporary.

We consider numerous factors when determining whether potential other-than-temporary impairment exists over the period which a security is expected to recover. The principal factors considered are the length of time and the extent to which the fair value has been less than the amortized cost basis; the financial condition of the issuer (and guarantor, if any) and adverse conditions specifically related to the security, industry or geographic area; any failure of the issuer of the security to make scheduled interest or principal payments; any changes to the rating of a security by a rating agency; and the presence of credit enhancements, if any, including the guarantee of the federal government or any of its agencies.

For debt securities, other-than-temporary impairment is considered to have occurred if we intend to sell the security, it is more likely than not we will be required to sell the security before recovery of its amortized cost basis, or the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. In determining the present value of expected cash flows, we discount the expected cash flows at the effective interest rate implicit in the security at the date of acquisition or, for debt securities that are beneficial interests in securitized financial assets, at the current rate used to accrete the beneficial interest. In estimating cash flows expected to be collected, we use available information with respect to security prepayment speeds, expected deferral rates and severity, whether subordinated interests, if any, are capable of absorbing estimated losses, and the value of any underlying collateral.

Deferred Tax Assets.The provision for income taxes is based upon income in our Consolidated Financial Statements, rather than amounts reported on our income tax return. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on our deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date. Under GAAP, a valuation allowance is required to be recognized if it is more likely than not that a deferred tax asset will not be realized. The determination as to whether we will be able to realize a deferred tax asset is highly subjective and dependent upon judgment concerning our evaluation of both positive and negative evidence, our forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. Positive evidence includes the existence of taxes paid in available carryback years as well as the probability that taxable income will be generated in future periods, while negative evidence includes any cumulative losses in the current year and prior two years and general business and economic trends. We had net cumulative losses for the three years ended December 31, 2010. This extended period of losses, combined with our analysis of future earnings, resulted in us taking an $8.5 million deferred tax valuation allowance at December 31, 2010 which increased $3.3 million to $11.8 million at March 31, 2011 due to continued losses. Should we continue to experience losses while we work through our problem assets, then it is likely that we will be required to establish an increased valuation allowance in the coming quarters.

Mortgage Servicing Rights. Mortgage servicing rights are recognized as separate assets when those rights are acquired through purchase or through sale of financial assets. Generally, purchased servicing rights are capitalized at the price paid to acquire the rights. For sales of mortgage loans, a portion of the cost of originating the loan is allocated to the servicing rights based on relative fair value. Fair value is based on market prices for comparable mortgage servicing rights, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net

servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Capitalized servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. If the fair value of these rights is less than its carrying value, we would be required to take a charge against earnings to write down these assets to the lower value. Servicing rights are valued annually by a third party for impairment.

Real Estate Owned (REO).REO, consisting of properties obtained through foreclosure or through a deed in lieu of foreclosure in satisfaction of loans, is reported at the lower of cost or fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources. The cost or fair value is then reduced by estimated selling costs. Management also considers other factors, including changes in absorption rates, length of time the property has been on the market and anticipated sales values, which have resulted in adjustments to the collateral value estimates indicated in certain appraisals. At the time of foreclosure or initial possession of collateral, any excess of the loan balance over the fair value of the REO is treated as a charge against the allowance for loan losses.

Subsequent declines in the fair value of REO below the new cost basis are recorded through valuation adjustments. Significant judgments and complex estimates are required in estimating the fair value of REO, and the period of time within which such estimates can be considered current is significantly shortened during periods of market volatility. In response to market conditions and other economic factors, management may utilize liquidation sales as part of its problem asset disposition strategy. As a result of the significant judgments required in estimating fair value and the variables involved in different methods of disposition, the net proceeds realized from sales transactions could differ significantly from appraisals, comparable sales, and other estimates used to determine the fair value of REO. Management reviews the value of REO each quarter and adjusts the values as appropriate. Any subsequent adjustments to the value, and gains or losses on sales are recorded as “Loss on REO”. Revenue and expenses from REO operations are recorded as “REO expense”. Both are components of noninterest expense.

Bank-Owned Life Insurance.We have purchased life insurance policies on certain key employees and directors. These policies are recorded in other assets at their cash surrender values, or the amounts that can be realized. Income from these policies and changes in the net cash surrender value are recorded in noninterest income.

Balance Sheet Analysis: March 31, 2011 compared to December 31, 2010

Total assets decreased $88.9 million, or 8.7%, to $932.8 million at March 31, 2011, from $1.0 billion at December 31, 2010. The decline in total assets is a result of continued weak loan demand from qualified borrowers and our deliberate efforts to reduce the size of our consolidated balance sheet to maintain our capital ratios. Net loans declined $30.6 million, or 4.4%, and investment securities declined $62.0 million, or 28.6%, from December 31, 2010 to March 31, 2011. These reductions were partially offset by a $2.2 million increase in cash and cash equivalents, a $2.0 million increase in REO and a $0.6 million aggregate increase in all other asset categories during the quarter. Weak loan demand and proceeds from the sale of securities in turn allowed us to repay FHLB borrowings totaling $62.5 million and brokered deposits totaling $32.7 million during the first quarter of 2011.

Cash and Cash Equivalents.Cash and cash equivalents increased $2.2 million, or 12.4%, to $20.3 million at March 31, 2011, from $18.0 million at December 31, 2010. Interest-earning deposits at the FHLB of Atlanta increased $4.0 million, or 38.1%, to $14.5 million at March 31, 2011, from $10.5 million at December 31, 2010. Cash and due from banks declined $1.7 million, or 23.3%, from $7.5 million to $5.8 million over the same period. Interest-earning deposits are temporary overnight investments and balances are used to meet cash demands. Liquid funds were used to repay maturing brokered deposits and FHLB advances during the quarter ended March 31, 2011.

Loans. The following table presents our loan portfolio composition and the corresponding percentage of total loans at the dates indicated. Residential one- to four-family construction loans include speculative construction loans and permanent construction loans for individuals still in the construction phase. Other construction and land loans include residential acquisition and development loans, commercial undeveloped land, and improved and unimproved lots. Commercial business loans include commercial unsecured loans and commercial loans secured by business assets.

   At March 31,  At December 31, 
   2011  2010 
   Amount   Percent  Amount   Percent 
   (Dollars in thousands) 

Real estate loans:

       

One-to four-family residential

  $241,163     34.8 $254,160     35.4

Commercial

   202,122     29.3    201,219     28.0  

Home equity loans and lines of credit

   73,600     10.7    75,322     10.5  

One-to four-family residential construction

   15,207     2.2    15,552     2.2  

Other construction and land

   139,615     20.2    151,894     21.2  

Commercial business

   15,122     2.2    15,395     2.1  

Consumer

   3,941     0.6    4,288     0.6  
                   

Total loans

   690,770     100.0  717,830     100.0
             

Less other items:

       

Deferred loan fees, net

   2,192      2,326    

Allowance for loan losses

   20,864      17,195    
             

Total loans, net

  $667,714     $698,309    
             

Net loans declined $30.6 million, or 4.4%, to $667.7 million at March 31, 2011, compared to $698.3 million at December 31, 2010. During this period, one- to four-family residential loans decreased $13.0 million, other construction and

land loans decreased $12.3 million, home equity loans and lines of credit decreased $1.7 million, and our allowance for loan losses increased $3.7 million. Net loans represented 71.6% of total assets at March 31, 2011, compared to 68.3% at December 31, 2010. Net loans declined at a slower pace than total assets during the period. The percentage increase reflects the reduction in the size of our consolidated balance sheet at March 31, 2011.

Delinquent Loans. When a loan is 15 days past due, we contact the borrower to inquire as to why the loan is past due. When a loan is 30 days or more past due, we increase collection efforts to include all available forms of communication. When the loan is 45 days past due, we generally issue a demand letter and further explore the reasons for non-repayment, discuss repayment options, and inspect the collateral. In the event the loan officer or collections staff has reason to believe restructuring will be mutually beneficial to the borrower and Bank, the borrower will be referred to the Bank’s Loss Mitigation Manager to explore restructuring alternatives to foreclosure. Once the demand period has expired and it has been determined restructuring is not a viable option, the Bank’s counsel is instructed to pursue foreclosure.

Loans are automatically placed on non-accrual status when payment of principal and/or interest is 90 days or more past due. Loans are also placed on non-accrual status if full collection of principal or interest cannot be reasonably assured. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed. The loan may be returned to accrual status if payments are made, bringing the loan to less than 90 days past due, and full payment of principal and interest is reasonably expected, generally after six consecutive months of performance on reasonable terms. Cash payments on non-accrual loans are applied against principal until the loan is returned to accrual status.

The following table sets forth certain information with respect to our loan portfolio delinquencies at the dates indicated. We have no loans greater than 90 days past due that are accruing interest. Residential one- to four-family construction loans include speculative construction loans and permanent construction loans for individuals that are still in the construction phase. Other construction and land includes residential acquisition and development loans, commercial undeveloped land and one- to four-family improved and unimproved lots. Commercial loans not secured by real estate include commercial unsecured loans and commercial loans secured by business assets.

   Delinquent loans 
   30-89 Days
Amount
   90 Days and over  (1)
Amount
   Total
Amount
 
   (Dollars in thousands) 

At March 31, 2011

      

Real estate loans:

      

One-to four-family residential

  $3,786    $12,838    $16,624  

Commercial

   5,241     9,500     14,741  

Home equity loans and lines of credit

   1,452     1,079     2,531  

One- to four-family residential construction

   —       3,161     3,161  

Other construction and land

   6,768     22,414     29,182  

Commercial business

   2,386     883     3,269  

Consumer

   22     11     33  
               

Total loans

  $19,655    $49,886    $69,541  

At December 31, 2010

      

Real estate loans:

      

One-to four-family residential

  $5,949    $17,525    $23,474  

Commercial

   7,179     4,906     12,085  

Home equity loans and lines of credit

   1,674     1,362     3,036  

One- to four-family residential construction

   475     1,777     2,252  

Other construction and land

   5,600     20,661     26,261  

Commercial business

   185     957     1,142  

Consumer

   90     9     99  
               

Total loans

  $21,152    $47,197    $68,349  
               

(1)All 90 day and over loans are on non-accrual status.

Total delinquent loans increased $1.2 million, or 1.7%, to $69.5 million at March 31, 2011, from $68.3 million at December 31, 2010. Of this amount, loans 30-89 days past due decreased $1.5 million, or 7.1%, to $19.7 million at March 31, 2011, from $21.2 million at December 31, 2010, while loans 90 days and over increased $2.7 million, or 5.7%, to $49.9 million at March 31, 2011, from $47.2 million at December 31, 2010.

Total outstanding loans 90 days or more past due, including the percentage of loans past due to net loans receivable, are shown below at the dates indicated.

   Number of loans   Amount   Percentage of loans
Receivable, net
 
   (Dollars in thousands) 

At March 31, 2011

   145    $49,886     7.47

At December 31, 2010

   150     47,197     6.76  

Non-performing Assets.The table below sets forth the amounts and categories of our non-performing assets at the dates indicated, including TDRs.

   At March 31,
2011
  At December 31,
2010
 
   (Dollars in Thousands) 

Non-accrual loans:

   

Real estate loans:

   

One- to four-family residential

  $13,028   $21,118  

Commercial

   15,371    9,338  

Home equity loans and lines of credit

   1,869    1,362  

One- to four-family residential construction

   3,161    1,777  

Other construction and land

   24,847    25,822  

Commercial business

   889    1,056  

Consumer

   11    9  
         

Total non-accrual loans

   59,176    60,482  
         

Loans delinquent 90 days or greater and still accruing:

   

Real estate loans:

   

One- to four-family residential

   —      —    

Commercial

   —      —    

Home equity loans and lines of credit

   —      —    

One- to four-family residential construction

   —      —    

Other construction and land

   —      —    

Commercial business

   —      —    

Consumer

   —      —    
         

Total loans delinquent 90 days or greater and still accruing

   —      —    
         

Troubled debt restructurings still accruing

   13,989    15,095  
         

Total non-performing loans

   73,165    75,577  

Foreclosed real estate:

   

One- to four-family residential

   7,095    5,712  

Commercial

   2,805    2,244  

Other construction and land

   9,467    10,200  

Residential lots

   4,124    3,355  
         

Total foreclosed real estate

   23,491    21,511  
         

Total non-performing assets

  $96,656   $97,088  
         

Ratios:

   

Non-performing loans to total loans

   10.59  10.53

Non-performing assets to total assets

   10.36  9.50

Non-performing assets include non-accrual loans, loans 90 days or more past due and still accruing interest, TDRs that are still accruing interest, and REO. Total non-performing assets decreased $0.4 million, or 0.4%, to $96.7 million at March 31, 2011, from $97.1 million at December 31, 2010. During the first quarter of 2011, the Bank acquired $6.1 million in REO in satisfaction of mortgage loans. At March 31, 2011, non-accrual loans totaled $59.2 million compared to $60.5 million at December 31, 2010, a decrease of $1.3 million. During the same period, non-accruing one- to four-family

residential loans decreased $8.1 million to $13.0 million, commercial real estate loans increased $6.1 million to $15.4 million, and other construction and land which includes land development loans, decreased $1.0 million to $24.8 million.

Accruing TDRs are included as non-performing assets. Accruing TDRs decreased $1.1 million, or 7.3%, at March 31, 2011, to $14.0 million from $15.1 million at December 31, 2010. We classify loans as TDRs when certain modifications are made to the loan terms and concessions are granted to the borrowers due to their financial difficulty. Our practice is to only restructure loans for borrowers in financial difficulty that have designed a viable business plan to fully pay off all outstanding debt, interest and fees, either by generating additional income from the business or through liquidation of assets. These loans may continue to accrue interest as long as the borrower complies with the revised terms and conditions and has demonstrated repayment performance with the modified terms.

The following table presents unrecognized interest income on non-accrual loans for the period indicated.

    For the quarters ended 
   March 31,   March 31, 
   2011   2010 
   (Dollars in thousands) 

Gross interest income that would have been recognized

  $1,113    $512  

Interest income recognized

   181     80  
          

Interest income foregone

  $932    $432  
          

Classification of Assets.Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as Substandard, Doubtful, or Loss. An asset is considered Substandard if it displays identifiable weakness without appropriate mitigating factors. These loans may include some deterioration in repayment capacity and/or loan-to-value of underlying collateral. Substandard assets include those assets characterized by the distinct possibility that we 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 collection in full is highly questionable or improbable. Assets classified as Loss are those considered uncollectible and of such little value that their continuance as assets is not warranted. Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve our close attention, are required to be designated as special mention.

We maintain an allowance for loan losses at an amount estimated to equal all credit losses incurred in our loan portfolio that are both probable and reasonable to estimate at a balance sheet date. We review our asset portfolio no less frequently than quarterly to determine whether any assets require classification in accordance with applicable regulations.

The following table sets forth our classified assets and criticized assets at the dates indicated.

   At March 31,
2011
   At December 31,
2010
 
   (Dollars in thousands) 

Classified loans:

    

Substandard

  $113,761    $113,178  

Doubtful

   —       —    

Loss

   —       —    
          

Total classified loans

   113,761     113,178  

Special mention

   71,724     64,386  
          

Total criticized loans

  $185,485    $177,564  
          

Total criticized loans increased $7.9 million, or 4.5%, to $185.5 million at March 31, 2011, from $177.6 million at December 31, 2010, primarily as a result of a $7.3 million increase in special mention loans. This increase is due to the downgrade of a $9.1 million performing loan from “Pass” to “Special Mention.” The subject loan is secured by income producing real estate that is leased at near 100% occupancy. The downgrade was the result of the borrower’s outside investment in a land development project that has been delayed.

Potential Problem Loans.Potential problem loans, which are not included in non-performing assets, amounted to approximately $6.2 million, or 0.9% of total net loans outstanding, at March 31, 2011, compared to $4.2 million, or 0.6% of total loans outstanding, at December 31, 2010. Potential problem loans include impaired loans that are not TDRs and are still accruing. Potential problem loans represent those loans with a well-defined weakness which has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms.

The Bank had no loans with interest reserves outstanding at March 31, 2011.

Allowance for Loan Losses. We provide for loan losses based upon consistent application of our documented allowance for loan loss methodology. All loan losses are charged to the allowance for loan losses and all recoveries are credited to it. Additions to the allowance for loan losses are provided by charges to income based on various factors which in our judgment deserve current recognition in estimating probable losses. When any loan or portion thereof is classified Doubtful or Loss, the loan will be charged down or charged off against the allowance for loan losses. Loans are deemed Doubtful or Loss based on a variety of credit, collateral, documentation and other issues. When collateral is foreclosed or repossessed, any principal charge-off related to that transaction, based upon the most current appraisal or evaluation, along with estimated sales expenses is taken at that time. A committee consisting of members of lending management, credit risk

management, and accounting meets periodically, and at least quarterly, to review our allowance and the credit quality of our portfolio. The allocated allowance consists primarily of two components:

(1) Specific allowances established forimpaired loans (as defined by GAAP). The amount of impairment provided for a specific allowance is represented by the deficiency, if any, between the estimated fair value of the loan, or the loan’s observable market price, if any, or the underlying collateral, if the loan is collateral dependent, adjusted for sales costs, and the carrying value of the loan. Impaired loans for which the estimated fair value of the loan, or the loan’s observable market price or the fair value of the underlying collateral, if the loan is collateral dependent, adjusted for sales costs, exceeds the carrying value of the loan are not considered in establishing specific allowances for loan losses; and

(2) General allowances established for loan losses on a portfolio basis for loans that do not meet the definition of impaired loans. The portfolio is grouped into similar risk characteristics, primarily loan type and regulatory classification. We segregate unimpaired loans betweenclassified andnon-classified loans and apply an estimated loss rate to each group. The loss rate within each group can vary based on the type of loan. The loss rates applied are based upon our historical loss experience of each risk group for the past three years, adjusted, as appropriate, for the environmental factors discussed below. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions.

The adjustments to historical loss experience are based on our evaluation of several qualitative and environmental factors, including:

changes in any concentration of credit (including, but not limited to, concentrations by geography, industry or collateral type);

changes in the number and amount of non-accrual loans, criticized loans and past due loans;

changes in national, state and local economic trends;

changes in the types of loans in the loan portfolio;

changes in the experience and ability of personnel and management in the mortgage loan origination and loan servicing departments;

changes in the value of underlying collateral for collateral dependent loans;

changes in lending strategies; and

changes in lending policies and procedures.

In addition, we may establish an unallocated allowance to provide for probable losses that are inherent as of the reporting date but are not reflected in the allocated allowance.

We evaluate the allowance for loan losses based upon the combined total of the specific and general components.

Generally when the loan portfolio increases or decreases, absent other factors, the allowance for loan loss methodology results in a higher or lower dollar amount, respectively, of estimated probable losses than would be the case without the change.

Different types of loans generally have varying degrees of credit risk. Other construction and land, residential construction, commercial real estate, and commercial business loans generally have greater credit risks compared to one- to four-family residential mortgage loans we originate, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties typically depends on the successful operation of the related business and thus may be subject to a greater extent to adverse conditions in the real estate market and in the general economy.

The following table shows our allowance for loan losses at and for the quarters ended March 31, 2011 and 2010.

   At or for the three months ended March 31, 
   2011  2010 
   (Dollars in thousands) 

Balance at beginning of period

  $17,195   $17,772  

Charge-offs:

   

Real Estate:

   

One- to four-family residential

   2,548    1,324  

Commercial

   145    156  

Home equity loans and lines of credit

   518    1,377  

One- to four-family residential construction

   75    76  

Other construction and land

   3,188    894  

Commercial business

   11    58  

Consumer

   379    33  
         

Total charge-offs

   6,864    3,918  
         

Recoveries:

   

Real Estate:

   

One- to four-family residential

   75    18  

Commercial

   50    —    

Home equity loans and lines of credit

   205    177  

One- to four-family residential construction

   2    —    

Other construction and land

   365    346  

Commercial business

   52    1  

Consumer

   19    12  
         

Total recoveries

   768    554  
         

Net charge-offs

   6,096    3,364  

Provision for loan losses

   9,765    3,849  
         

Balance at end of period

  $20,864   $18,257  
         

Ratios:

   

Net charge-offs to average loans outstanding (annualized)

   3.48  1.76

Allowance for loan losses to non-performing loans at end of period

   28.52    38.12  

Allowance for loan losses to total loans at end of period

   3.03    2.40  

The total allowance for loan losses increased $3.7 million, or 21.5%, to $20.9 million at March 31, 2011, from $17.2 million at December 31, 2010. The provision for loan losses increased $5.9 million in the first quarter of 2011 to $9.8 million

from $3.8 million in the first quarter of 2010. The increased provision in the quarter resulted from several factors which occurred subsequent to year-end. First, the Bank accepted two short-sales during the quarter which resulted in a $3.1 million net loss and reduction to the allowance. Second, the Bank revised its real estate valuation requirements in the fourth quarter of 2010, raising its minimum acceptable appraisal standards and requiring that appraisals be conducted on a more frequent basis. Updated appraisals resulting from this policy change were received during the quarter ending March 31, 2011. These appraisals reflected the continued downward trend in real estate values, and, in those cases where the new appraisals reflected lower property values, this resulted in loan write-downs and additions to the allowance for loan losses. Third, as general economic conditions continued to be weak and as historical losses continued to increase the Bank increased its allowance for loans collectively evaluated for impairment by $1.2 million during the quarter ended March 31, 2011.

Allocation of Allowance for Loan Losses.The following table illustrates the allowance for loan losses allocated by loan category at March 31, 2011 and December 31, 2010. The allowance for loan losses 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.

   At March 31,
2011
  At December 31,
2010
 
   Allowance for
Loan losses
   Percent of
Loans in each
Category to
Total loans
  Allowance for
Loan losses
   Percent of
Loans in each
Category to
Loan losses
 
   (Dollars in thousands) 

Real estate loans:

       

One- to four-family residential

  $4,108     34.8 $4,097     35.4

Commercial

   5,398     29.3    4,206     28.0  

Home equity loans and lines of credit

   1,568     10.7    1,428     10.5  

One- to four-family residential construction

   668     2.2    540     2.2  

Other construction and land

   8,705     20.2    6,638     21.2  

Commercial business

   380     2.2    236     2.1  

Consumer

   37     0.6    50     0.6  
                   

Total allocated allowance

   20,864     100.0    17,195     100.0  

Unallocated

   —       —      —       —    

Total

  $20,864     100.0 $17,195     100.0
                   

We compute our allowance for loan losses using a methodology which identifies a specific allowance for individually impaired loans and a general allowance for homogeneous loans analyzed by loan type. See “– Allowance for Loan Losses” on pagefor detailed discussion on our methodology. The above allocation represents the combined allocation of the allowance by loan type of all loans regardless of whether the allowance is specific or general, and reflects that higher risks are associated with other construction and land loans and commercial real estate loans.

We review impaired loans individually to determine an appropriate allowance. When a loan or a portion of a loan is deemed a loss, we record a provision for the amount of the loss or charge-off the loss amount. The following table shows recorded loan balances, the unpaid principal balances, partial charge-offs, and specific allowances for impaired loans as of March 31, 2011. The table also shows the sum of the specific allowances and partial charge-offs expressed as a percentage of the unpaid principal balance.

   Recorded
Balance
   Unpaid principal
balance
   Partial
Charge-offs
   Specific
Allowance
   Specific allowance and
Partial charge-offs
Divided by

Unpaid principal
balance
 
   (Dollars in thousands) 

Loans without a specific valuation allowance

          

One- to four-family residential

  $3,361    $3,361    $—      $—       —  

Commercial real estate

   10,191     11,036     845     —       7.66  

Home equity loans and lines of credit

   —       —       —       —       —    

One- to four-family residential construction

   1,936     2,502     566     —       22.62  

Other construction and land

   5,742     6,170     428     —       6.94  

Commercial loans

   1,025     1,025     —       —       —    
                         

Total

  $22,255    $24,094    $1,839    $—       7.63 
                         

Loans with a specific valuation allowance

          

One- to four-family residential

   6,046     6,109     63     883     15.49  

Commercial real estate

   7,497     7,497     —       2,034     27.13  

Home equity loans and lines of credit

   584     687     103     303     59.10  

One- to four-family residential construction

   610     610     —       149     24.43  

Other construction and land

   16,006     17,709     1,703     3,948     31.91  

Commercial loans

   125     151     26     124     99.34  
                         

Total

  $30,868    $32,763    $1,895    $7,441     28.50 
                         

Total

          

One- to four-family residential

   9,407     9,470     63     883     9.99  

Commercial real estate

   17,688     18,533     845     2,034     15.53  

Home equity loans and lines of credit

   584     687     103     303     59.10  

One- to four-family residential construction

   2,546     3,112     566     149     22.98  

Other construction and land

   21,748     23,879     2,131     3,948     25.46  

Commercial loans

   1,150     1,176     26     124     12.76  
                         

Total

  $53,123    $ 56,857    $3,734    $7,441     19.65 
                         

The above table indicates that the Bank charged off or provided allowances totaling 19.65% of the unpaid principal balances of all impaired loans as of March 31, 2011.

Real Estate Owned (REO). REO increased $2.0 million, or 9.2%, to $23.5 million at March 31, 2011, from $21.5 million at December 31, 2010. During the quarter ended March 31, 2011, the Bank disposed of 21 properties in REO for a purchase price of $3.2 million, which included $1.9 million in net proceeds from sales, $1.7 million of loans originated for disposition of REO, less $0.4 million of sales costs. Losses on REO during the same period totaled $0.8 million. See “– Real estate owned (REO)” on pagefor a discussion on how we value our REO.

The following table shows REO by property type at the dates indicated.

   March 31
2011
   December 31,
2010
 
   (Dollars in thousands) 

One- to four-family improved properties

  $7,095    $5,712  

Commercial real estate

   2,805     2,244  

Commercial land and land development

   9,467     10,200  

Residential lots

   4,124     3,355  
          

Total

  $23,491    $21,511  
          

Our recovery experience in liquidating REO is shown in the following table. This table measures REO sales proceeds for the periods indicated, expressed as a percentage of the loan balances at the time the properties were transferred to REO.

  As a percentage of loan payoff balances at time of foreclosure: 
  REO book value  Real estate owned disposals, net proceeds
For the quarter ended
 
  At March 31,
2011
  Five quarter
Weighted avg. value
  March 31,
2011
  December 31,
2010
  September 30,
2010
  June 30,
2010
  March 31,
2010
 

Residential construction

  77.9  63.7  —    —    71.6  49.2  —  

One-to four-family residential

  66.3    67.6    65.2    60.1    67.3    75.0    78.2  

Commercial real estate

  53.6    63.9    53.2    65.1    —      —      —    

Other construction and land

  57.9    45.2    70.3    25.3    61.8    40.9    43.8  

Total

  59.8    55.3    68.0    46.6    66.9    52.4    52.5  

As of March 31, 2011, the book value of our REO, expressed as a percentage of the related loan balances at the time the properties were transferred to REO was 59.8%, compared to the five-quarter weighted average percentage of disposed REO of 55.3%, described above. During the quarter ending December 31, 2010, the Bank disposed of $3.6 million of REO in other construction and land, which equated to 25.6% of the related loan balances at the time of foreclosure. Of this $3.6 million, the Bank disposed of $1.6 million in residential building lots which were regarded as having very limited marketability. We regard residential building lots as one of the slowest selling types of properties in our market area.

Investment Securities. Our entire investment securities portfolio is classified as “available-for-sale” and is carried at fair value. The following table shows the amortized cost and fair value of our investment portfolio at the dates indicated.

   At March 31,   At December 31, 
   2011   2010 
   Amortized       Amortized     
   Cost   Fair value   Cost   Fair value 
   (Dollars in thousands) 

Investment securities available-for-sale:

        

U.S. Government and agency securities:

        

U.S. Government and agency obligations

  $14,507    $14,520    $32,213    $32,290  

U.S. Government structured agency obligations

   11,996     11,987     21,150     21,118  

Municipal obligations

   36,581     35,243     36,874     34,616  

Corporate bonds

   1,023     1,023     1,024     1,023  

Mortgage-backed securities:

        

U.S. Government agency sponsored mortgage-backed securities

   80,186     81,069     108,480     111,451  

SBA securities

   3,392     3,582     3,533     3,751  

Collateralized mortgage obligations

   6,871     6,849     12,056     12,021  

CRA investment fund

   530     530     526     527  
                    

Total securities available-for-sale

  $155,086    $154,803    $215,856    $216,797  
                    

Investment securities decreased $62.0 million, or 28.6%, to $154.8 million at March 31, 2011, compared to $216.8 million at December 31, 2010, primarily as a result of the sale of $59.2 million of securities during this period. Management elected to sell these securities to meet certain asset/liability management objectives, notably to reduce total assets in order to improve the Bank’s Tier I Leverage Capital and Total Risk-Based Capital ratios. See “– Liquidity and Capital Resources” on page.

InvestmentPortfolio Maturities and Yields.The composition and maturities of the investment securities portfolio at March 31, 2011 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. Municipal securities yields have been adjusted for a 34% federal tax-equivalent rate.

   One year or less  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
 
   (Dollars in thousands) 

Investment securities available-for-sale:

          

US Government and agency securities:

          

U.S. Government and agency obligations

  $—       —   $6,003     1.53 $8,504     3.16

U.S. Government and agency structured obligations

   —       —      2,500     1.00    6,996     1.73  

Municipal obligations (1)

   340     6.05    —       —      2,089     5.78  

Corporate bonds

   —       —      —       —      —       —    

Mortgage-backed securities:

          

U.S. Government sponsored agency mortgage-backed securities:

   —       —      —       —      8,973     2.29  

Small Business Administration securities

   —       —      —       —      —       —    

Collateralized mortgage obligations

   —       —      —       —      —       —    

CRA investment fund

   —       —      —       —      —       —    
                            

Total securities available-for-sale

  $340     6.05 $8,503     1.37 $26,562     2.70
                            

   More than ten years  Total securities 
   Amortized
Cost
   Weighted
Average
Yield
  Amortized
Cost
   Fair Value   Weighted
Average
Yield
 
   (Dollars in thousands) 

Investment securities available-for-sale:

         

US Government and agency securities:

         

U.S. Government and agency obligations

  $—       —   $14,507    $14,520     2.49

U.S. Government and agency structured obligations

   2,500     1.99    11,996     11,987     1.63  

Municipal obligations (1)

   34,152     6.35    36,581     35,243     6.31  

Corporate bonds

   1,023     7.35    1,023     1,023     7.35  

Mortgage-backed securities:

         

U.S. Government sponsored agency mortgage-backed securities:

   71,213     3.40    80,186     81,069     3.27  

Small Business Administration securities

   3,392     5.12    3,392     3,582     5.12  

Collateralized mortgage obligations

   6,871     0.89    6,871     6,849     0.89  

CRA investment fund

   530     3.22    530     530     3.22  
                        

Total securities available-for-sale

  $119,681     4.15 $155,086    $154,803     3.74
                        

(1)Municipal obligations are shown at a Federal 34% tax equivalent yield

Other Assets.Other assets decreased by $0.2 million, or 1.1%, to $18.3 million at March 31, 2011, from $18.5 million at December 31, 2010, principally as a result of a $0.4 million decline in prepaid FDIC deposit insurance assessment fees. Other assets at March 31, 2011, consisted of $4.1 million of current income tax receivables, $5.6 million of deferred tax assets, $2.9 million in prepaid FDIC deposit insurance assessments, $2.4 million of mortgage loan servicing rights and $3.4 million of other miscellaneous assets.

Deposits. Deposits declined $16.3 million, or 2.0%, to $782.1 million at March 31, 2011, from $798.4 million at December 31, 2010. Pursuant to management’s strategy to reduce the Bank’s interest expense by reducing its volatile deposits and borrowings, brokered deposits declined $32.7 million, or 21.4%, to $120.2 million at March 31, 2011, from $152.9 million at December 31, 2010. This decline in brokered deposits was partially offset by a $11.8 million increase in retail certificates of deposit and a $4.9 million increase in money market accounts. The following table presents details of our deposits by category at the dates indicated.

   For the quarter ended
March 31, 2011
  For the year ended
December 31, 2010
 
   Average
Balance
   Percent  Weighted
Average
Rate
  Average
Balance
   Percent  Weighted
Average
Rate
 
   (Dollars in thousands) 

Deposit type:

         

Savings accounts

  $19,693     2.5  0.31 $19,134     2.4  0.33

Time deposits

   473,537     59.4    2.07    510,726     63.1    2.36  

Money market accounts

   190,310     23.9    1.17    162,642     20.1    1.46  

Interest-bearing demand accounts

   62,322     7.8    0.23    63,958     7.9    0.24  

Noninterest-bearing demand accounts

   51,228     6.4    —      53,435     6.6    —    
                     

Total deposits

  $797,090     100.0  1.51 $809,895     100.0  1.71
                     

The following table presents details of the applicable interest rates on our certificates of deposit at the dates indicated.

   At March 31,   At December 31, 
   2011   2010 
   (Dollars in thousands) 

Interest Rate:

    

Less than 2.00%

  $231,788    $221,015  

2.00% to 3.99%

   215,691     247,387  

4.00% to 5.99%

   7,964     7,998  
          

Total

  $455,443    $476,400  
          

The following table presents details of the applicable interest rates on our certificates of deposit, by maturity as of March 31, 2011.

   At March 31, 2011 
   Period to maturity 
    Less than or
Equal to
One year
   More than
One to
Two years
   More than
Two to
Three years
   More than
Three years
   Total   Percent of
Total
 
   (Dollars in thousands) 

Interest Rate Range:

            

Less than 2.00%

  $134,772    $85,313    $8,917    $2,786    $231,788     50.8 

2.00% to 3.99%

   63,150     105,468     14,550     32,523     215,691     47.4  

4.00% to 5.99%

   1,766     6,000     198     —       7,964     1.8  
                              

Total

  $199,688    $196,781    $23,665    $35,309    $455,443     100.0 
                              

The following table presents details of the remaining maturity of our greater than $100,000 certificates of deposit as of March 31, 2011.

   At
March 31,  2011
 
   (Dollars in thousands) 

Three months or less

  $  24,291  

Over three months through six months

   34,975  

Over six months through one year

   8,729  

Over one year to three years

   93,031  

Over three years

   14,242  
     

Total

  $175,268  
     

Borrowings.Pursuant to management’s strategy to reduce the Bank’s interest expense by reducing its higher cost deposits and borrowings, and in order to reduce our total asset size and improve the Bank’s capital ratios, FHLB advances declined $62.5 million in the first quarter of 2011, or 48.7%, to $65.9 million from $128.4 million at December 31, 2010. This was primarily due to the early repayment of $42.5 million in fixed rate advances carrying a weighted average interest rate of 4.61%. The early repayment of these advances, which were scheduled to mature between July, 2011 and May, 2012, was made in conjunction with the sale of investment securities. The Bank incurred $1.4 million in fees relating to the prepayment of the FHLB advances, which was offset by $1.6 million in gains on sales of investment securities. The Bank also repaid $20.0 million in other regularly maturing advances during the first quarter of 2011.

   At or for the three months ended March 31, 
   2011  2010 
   (Dollars in thousands) 

Balance at end of period

  $65,900   $153,400  

Average balance during period

   116,300    169,400  

Maximum outstanding at any month end

   128,400    178,400  

Weighted average interest rate at end of period

   3.66  4.06

Weighted average interest rate during period

   3.87    4.02  

Accrued Expenses and Other Liabilities. Accrued expenses and other liabilities declined $0.6 million, or 4.1%, to $14.0 million at March 31, 2011, from $14.6 million at December 31, 2010, primarily due to a $0.5 million decline in accrued expenses. Accrued expenses and other liabilities consist of $12.1 million of accrued employee and director retirement benefits, $1.1 million of accrued interest payable, and $0.8 million of other expenses payable.

Equity. Total equity declined by $9.7 million, or 14.6%, to $56.3 million at March 31, 2011, from $66.0 million at December 31, 2010, as a result of $8.9 million in losses during the first quarter of 2011 and a decrease of $0.7 million to $0.2 million in other comprehensive income due to an increase in net unrealized losses on securities available-for-sale. Pre-tax losses in the first quarter, 2011, were not offset by an income tax benefit.

Balance Sheet Analysis: December 31, 2010 and December 31, 2009

Total assets decreased $56.8 million, or 5.3%, to $1.0 billion at December 31, 2010, from $1.1 billion at December 31, 2009. The decline was primarily a result of the Bank moving problem loans through the liquidation process, the sale of REO, continued weak loan demand from qualified borrowers, and continued calls of investment securities as interest rates remained low. Net loans declined $55.7 million, or 7.4%, cash and cash equivalents declined $16.3 million, or 47.4%, and all other asset categories, excluding investment securities, declined $8.0 million, or 8.3%, since December 31, 2009. Investment securities increased from December 31, 2009 to December 31, 2010 by $23.2 million, or 12.0%. During 2010, the Bank controlled its growth using proceeds from the reduction in loans and increases in deposits to reduce FHLB advances by $50.0 million, or 28.0%.

Cash and Cash Equivalents. Total cash and cash equivalents declined $16.3 million, or 47.4%, to $18.0 million at December 31, 2010, from $34.3 million at December 31, 2009. Interest-earning deposits with the FHLB declined $15.1 million, or 58.9%, to $10.5 million at December 31, 2010 from $25.6 million at December 31, 2009. Cash and due from banks declined $1.2 million, or 13.7%, to $7.5 million from $8.7 million over the same period. Interest-earning deposits are temporary overnight investments and balances are used to meet cash demands. Liquid funds were used to repay higher costing maturing brokered deposits and FHLB advances during 2010.

Loans.The following table presents our loan portfolio composition and the corresponding percentage of total loans for the dates indicated. Residential one- to four-family construction loans include speculative construction loans and permanent construction loans for individuals still in the construction phase. Other construction and land loans include residential acquisition and development loans, commercial undeveloped land and one- to four-family improved and unimproved lots. Commercial business loans include commercial unsecured loans and commercial loans secured by business assets.

   At December 31, 
   2010      2009      2008     
   Amount   Percent  Amount   Percent  Amount   Percent 
   (Dollars in thousands) 

Real estate loans:

          

One-to four-family residential

  $254,160     35.4 $244,830     31.6 $239,743     29.2

Commercial

   201,219     28.0    197,006     25.4    181,452     22.2  

Home equity loans and lines of credit

   75,322     10.5    90,219     11.7    94,656     11.6  

One-to four-family residential construction

   15,552     2.2    28,559     3.7    54,160     6.6  

Other construction and land

   151,894     21.2    190,983     24.7    221,218     27.0  

Commercial business

   15,395     2.1    16,545     2.1    19,530     2.4  

Consumer

   4,288     0.6    6,242     0.8    8,143     1.0  
                            

Total loans

   717,830     100.0  774,384     100.0  818,902     100.0
                   

Less other items:

          

Deferred loan fees, net

   2,326      2,646      2,931    

Allowance for loan losses

   17,195      17,772      13,167    
                   

Total loans, net

  $698,309     $753,966     $802,804    
                   
   At December 31,        
   2007  2006        
   Amount   Percent  Amount   Percent        
   (Dollars in thousands)        

Real estate loans:

          

One-to four-family residential

  $250,236     30.0 $250,491     31.5   

Commercial

   162,869     19.6    153,161     19.2     

Home equity loans and lines of credit

   88,866     10.7    86,206     10.8     

One-to four-family residential construction

   74,088     8.9    78,948     9.9     

Other construction and land

   224,206     26.9    194,241     24.4     

Commercial business

   21,601     2.6    22,297     2.8     

Consumer

   10,781     1.3    10,997     1.4     
                      

Total loans

   832,647     100.0  796,341     100.0   
                

Less other items:

          

Deferred loan fees, net

   3,512      3,641       

Allowance for loan losses

   9,520      8,122       
                

Total loans, net

  $819,615     $784,578       
                

In mid-2007 as economic conditions began to deteriorate, management recognized the need to reduce the Bank’s concentration in higher risk loans, especially one- to four-family residential construction and other construction and land development loans. The Bank subsequently reduced its concentration in residential one- to four-family construction loans, which declined to 2.2% of total loans at December 31, 2010 from 9.9% at December 31, 2006, and other construction and land development loans, which declined to 21.2% at December 31, 2010 from 27.0% at December 31, 2008. Reductions have been achieved through payoffs of maturing loans, fewer new loans, and foreclosure of non-performing loans. Management further revised the Bank’s lending practices in 2010, including limiting renewal and restructurings of commercial real estate loans and requiring conversion of interest-only payment loans to principal and interest payment whenever possible.

Net loans represented 68.3% of our total assets at December 31, 2010. Net loans declined by $55.7 million, or 7.4%, to $698.3 million at December 31, 2010, from $754.0 million at December 31, 2009. This decrease was primarily due to a $39.1 million decrease in other construction and land development loans and a $14.9 million decrease in home equity and lines of credit loans. During 2010, the Bank received $16.5 million in REO in satisfaction of mortgage loans. Weak market conditions and soft demand from qualified borrowers prevented the replacement of maturing loans. Partially offsetting the decreases in our loan portfolio was a $9.3 million increase in one- to four-family residential loans and a $4.2 million increase in commercial real estate loans. During 2010, the Bank offered several non-conforming residential loan products to customers within its market area. These portfolio loans are within the scope of our lending policies, but not typical conforming secondary market products. Examples include loans with short-term maturities or loans with collateral which is rural in nature.

The following tables present loans by contractual maturity along with corresponding weighted average rates by category as of December 31, 2010.

   One-to four-family
residential real estate
  Commercial real estate  Home equity loans and
lines of credit
  One- to four-family
Construction
 
   Amount   Weighted
Average
rate
  Amount   Weighted
Average
rate
  Amount   Weighted
Average
rate
  Amount   Weighted
Average
rate
 
   (Dollars in thousands) 

Due During the Twelve Months Ending December 31,

             

2011

  $6,467     4.63 $29,119     4.98 $1,201     6.39 $5,502     4.05

2012

   4,114     5.67    6,066     6.71    753     5.90    258     7.00  

2013

   3,378     6.13    21,729     5.22    460     5.87    1,936     5.91  

2014 to 2015

   10,090     5.91    45,242     5.55    720     6.17    1,089     4.54  

2016 to 2020

   13,144     5.18    23,039     5.77    37,383     5.89    —       0.00  

2022 to 2025

   24,654     4.80    24,257     5.33    34,736     5.45    —       0.00  

2026 and beyond

   192,313     4.92    51,767     6.08    69     4.72    6,767     5.45  
                         

Total

  $254,160     4.98   $201,219     5.60   $75,322     5.70   $15,552     4.97  
                         
   Other construction and land  Commercial business  Consumer  Total 
   Amount   Weighted
Average
Rate
  Amount   Weighted
Average
Rate
  Amount   Weighted
Average
Rate
  Amount   Weighted
Average
Rate
 
   (Dollars in thousands) 

Due During the Twelve Months Ending December 31,

             

2011

  $52,174     3.00  $5,410     4.97  $259     8.42  $100,132     3.90 

2012

   15,477     4.77    1,869     6.33    580     8.99    29,117     5.53  

2013

   17,491     5.12    1,309     5.21    817     8.47    47,120     5.34  

2014 to 2015

   18,440     5.15    2,692     6.34    684     8.33    78,957     5.55  

2016 to 2020

   11,140     5.82    3,044     4.42    1,131     7.97    88,881     5.72  

2021 to 2025

   12,964     6.57    864     4.65    172     6.32    97,647     5.40  

2026 and beyond

   24,208     5.89    207     14.12    645     15.67    275,976     5.27  
                         

Total

  $151,894     4.66   $15,395     5.39   $4,288     9.38   $717,830     5.20  
                         

Longer term one- to four-family residential, commercial real estate, and home equity loans and lines of credit typically carry interest rates which adjust to U.S. Treasury indices orThe Wall Street Journal Prime Rate. Longer term residential one- to four-family construction loans represent construction-permanent loans which, upon completion of the construction phase, become one- to four-family residential loans.

The following table presents loans with predetermined interest rates and adjustable interest rates due after December 31, 2011.

   Due after December 31, 2011 
   Fixed   Adjustable   Total 
   (Dollars in thousands) 

Real estate loans:

      

One-to four-family residential

  $81,486    $166,207    $247,693  

Commercial

   83,915     88,185     172,100  

Home equity loans and lines of credit

   11,170     62,951     74,121  

One- to four-family residential construction

   5,963     4,087     10,050  

Other construction and land

   44,834     54,886     99,720  

Commercial business

   5,158     4,827     9,985  

Consumer

   3,513     516     4,029  
               

Total loans

  $236,039    $381,659    $617,698  
               

Delinquent Loans. When a loan is 15 days past due, we contact the borrower to inquire as to why the loan is past due. When a loan is 30 days or more past due, we increase collection efforts to include all available forms of communication. When the loan is 45 days past due, we generally issue a demand letter and further explore the reasons for non-repayment, discuss repayment options, and inspect the collateral. In the event the loan officer or collections staff has reason to believe restructuring will be mutually beneficial to the borrower and Bank, the borrower will be referred to the Bank’s Loss Mitigation Manager to explore restructuring alternatives to foreclosure. Once the demand period has expired and it has been determined restructuring is not a viable option, the Bank’s counsel is instructed to pursue foreclosure.

Loans are automatically placed on non-accrual status when payment of principal and/or interest is 90 days or more past due. Loans are also placed on non-accrual status if full collection of principal or interest cannot be reasonably assured. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed. The loan may be returned to accrual status if payments are made, bringing the loan to less than 90 days past due, and full payment of principal and interest is reasonably expected, generally after six consecutive months of performance on reasonable terms. Cash payments on non-accrual loans are applied against principal until the loan is returned to accrual status.

The following table sets forth certain information with respect to our loan portfolio delinquencies at the dates indicated. We have no loans greater than 90 days past due that are still accruing interest. Residential one- to four-family construction loans include speculative construction loans and permanent construction loans for individuals that are still in the construction phase. Other construction and land includes residential acquisition and development loans, commercial undeveloped land and one- to four-family improved and unimproved lots. Commercial loans, not secured by real estate include commercial unsecured loans and commercial loans secured by business assets.

   Delinquent loans 
   30-89 Days
Amount
   90 Days and over (1)
Amount
   Total
Amount
 
   (Dollars in thousands) 

At December 31, 2010

      

Real estate loans:

      

One-to-four family residential

  $5,949    $17,525    $23,474  

Commercial

   7,179     4,906     12,085  

Home equity loans and lines of credit

   1,674     1,362     3,036  

One- to four-family residential construction

   475     1,777     2,252  

Other construction and land

   5,600     20,661     26,261  

Commercial business

   185     957     1,142  

Consumer

   90     9     99  
               

Total loans

  $21,152    $47,197    $68,349  
               

At December 31, 2009

      

Real estate loans:

      

One-to-four family residential

  $4,664    $8,407    $13,071  

Commercial

   2,037     3,477     5,514  

Home equity loans and lines of credit

   2,466     1,960     4,426  

One- to four-family residential construction

   2,974     1,294     4,268  

Other construction and land

   5,639     4,289     9,928  

Commercial business

   237     275     512  

Consumer

   203     22     225  
               

Total loans

  $18,220    $19,724    $37,944  
               

At December 31, 2008

      

Real estate loans:

      

One-to four-family residential

  $3,934    $5,479    $9,413  

Commercial

   1,313     2,718     4,031  

Home equity loans and lines of credit

   1,875     722     2,597  

One- to four-family residential construction

   4,248     4,554     8,802  

Other construction and land

   15,765     12,269     28,034  

Commercial business

   1,179     59     1,238  

Consumer

   258     52     310  
               

Total loans

  $28,572    $25,853    $54,425  
               

At December 31, 2007

      

Real estate loans:

      

One-to four-family residential

  $2,053    $851    $2,904  

Commercial

   2,974     395     3,369  

Home equity loans and lines of credit

   754     57     811  

One- to four-family residential construction

   2,012     856     2,868  

Other construction and land

   7,396     3,457     10,853  

Commercial business

   1,068     87     1,155  

Consumer

   151     —       151  
               

Total loans

  $16,408    $5,703    $22,111  
               

At December 31, 2006

      

Real estate loans:

      

One-to four-family residential

  $2,752    $1,696    $4,448  

Commercial

   308     1,057     1,365  

Home equity loans and lines of credit

   1,278     —       1,278  

One- to four-family residential construction

   3,666     281     3,947  

Other construction and land

   2,660     1,102     3,762  

Commercial business

   100     61     161  

Consumer

   130     17     147  
               

Total loans

  $10,894    $4,214    $15,108  
               

(1)As of December 31, 2009, all 90 day and over loans are on non-accrual status.

Total loans 30-89 days past due increased $3.0 million, or 16.1%, to $21.2 million at December 31, 2010 from $18.2 million at December 31, 2009. Loans 90 days and over increased $27.5 million, or 139.3%, to $47.2 million at December 31, 2010, from $19.7 million at December 31, 2009. Total delinquent loans previously fell to $37.9 million at December 31, 2009, compared to $54.4 million at December 31, 2008, before increasing to $68.3 million at December 31, 2010.

Total outstanding loans 90 days or more past due, including non-accrual loans, and the percentage of loans past due to total loans receivable are shown below for the periods indicated.

    Number of
Loans
   Amount   Percentage of loans
Receivable, net
 
   (Dollars in thousands) 

At December 31, 2010

   145    $47,197     6.76

At December 31, 2009

   81     19,724     2.62  

At December 31, 2008

   81     25,855     3.22  

Non-performing Assets. The table below sets forth the amounts and categories of our non-performing assets at the dates indicated including TDRs.

   At December 31, 
   2010  2009  2008  2007  2006 
   (Dollars in thousands) 

Non-accrual loans:

      

Real estate loans:

      

One- to four-family residential

  $21,118   $8,450   $3,074   $—     $1,411  

Commercial

   9,338    4,445    2,320    395    159  

Home equity loans and lines of credit

   1,362    1,960    299    5    —    

One- to four-family residential construction

   1,777    1,294    7,408    856    281  

Other construction and land

   25,822    4,922    24,768    3,257    1,063  

Commercial business

   1,056    345    57    54    44  

Consumer

   9    22    17    —      17  
                     

Total non-accrual loans

   60,482    21,438    37,943    4,567    2,975  
                     

Loans delinquent 90 days or greater and still accruing:

      

Real estate loans:

      

One- to four-family residential

   —      —      2,854    851    285  

Commercial

   —      —      398    —      898  

Home equity loans and lines of credit

   —      —      423    52    —    

One- to four-family residential construction

   —      —      —      —      —    

Other construction and land

   —      —      417    200    39  

Commercial business

   —      —      2    33    17  

Consumer

   —      —      35    —      —    
                     

Total loans delinquent 90 days or greater and still accruing

   —      —      4,129    1,136    1,239  
                     

Troubled debt restructurings still accruing

   15,095    22,263    1,424    63    101  
                     

Total non-performing loans

   75,577    43,701    43,496    5,766    4,315  

Foreclosed real estate:

      

One- to four-family residential

   5,712    6,487    3,427    1,077    819  

Commercial

   2,244    858    1,304    308    —    

Other construction and land

   10,200    11,572    209    —      146  

Residential lots

   3,355    3,912    591    813    686  
                     

Total foreclosed real estate

   21,511    22,829    5,531    2,198    1,651  
                     

Total non-performing assets

  $97,088   $66,530   $49,027   $7,964   $5,966  
                     

Ratios:

      

Non-performing loans to total loans

   10.53  5.64  5.31  0.69  0.54

Non-performing assets to total assets

   9.50  6.17  4.40  0.76  0.60

Total non-performing assets increased $30.6 million, or 45.9%, to $97.1 million at December 31, 2010, from $66.5 million at December 31, 2009. Beginning in 2009, the Bank modified its non-accrual policy such that all loans greater than 90 days past due, regardless of collectability prospects, are placed on non-accrual status. During 2010, the Bank intensified its practice of manually reviewing problem loans less than 90 days past due, and placing those loans on non-accrual status, where the recognition of interest income is considered doubtful.

Over the three-year period ended December 31, 2010, non-accruing other construction and land loans reached a low of $4.9 million at December 31, 2009, primarily due to $17.1 million in four large loan relationships being foreclosed during 2009 and moved to REO.

All TDRs still accruing interest are shown as non-performing loans in the previous table. TDRs still accruing interest declined $7.2 million, or 32.2%, to $15.1 million at December 31, 2010, from $22.3 million at December 31, 2009. During 2009, the Bank began using restructuring more frequently as a means to address problem loans. We classify loans as TDRs when certain modifications are made to the loan terms and concessions are granted to the borrowers due to their financial difficulty. Our practice is to only restructure loans for borrowers in financial difficulty that have designed a viable business plan to fully repay all outstanding debt, interest and fees, either by generating additional income from the business or through liquidation of assets. These loans may continue to accrue interest as long as the borrower complies with the revised terms and conditions and has demonstrated repayment performance with the modified terms.

The following table presents interest income lost on non-accrual loans for the periods indicated.

    For the years ended 
   December 31,
2010
   December 31,
2009
   December 31,
2008
 
   (Dollars in thousands) 

Gross interest income that would have been recognized

  $3,223    $2,868    $385  

Interest income recognized

   1,237     1,295     299  
               

Interest income foregone

  $1,986    $1,573    $86  
               

Classification of Assets.Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as Substandard, Doubtful, or Loss. An asset is considered

Substandard if it displays identifiable weakness without appropriate mitigating factors. These loans may include some deterioration in repayment capacity and/or loan-to-value of underlying collateral. Substandard assets include those assets characterized by the distinct possibility that we 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 collection in full is highly questionable or improbable. Assets classified as Loss are those considered uncollectible and of such little value that their continuance as assets is not warranted. Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve our close attention, are required to be designated as special mention.

We maintain an allowance for loan losses at an amount estimated to equal all credit losses incurred in our loan portfolio that are both probable and reasonable to estimate at a balance sheet date. We review our asset portfolio no less frequently than quarterly to determine whether any assets require classification in accordance with applicable regulations.

The following table sets forth our amounts of classified assets and criticized assets at the dates indicated.

   At December 31, 
   2010   2009   2008 
   (Dollars in thousands) 

Classified loans:

      

Substandard

  $113,178    $92,685    $65,332  

Doubtful

   —       —       47  

Loss

   —       —       30  
               

Total classified loans:

   113,178     92,685     65,409  

Special mention

   64,386     27,356     21,428  
               

Total criticized loans

  $177,564    $120,041    $86,837  
               

Total criticized loans increased $57.6 million, or 47.9%, to $177.6 million at December 31, 2010, from $120.0 million at December 31, 2009. During this period, Substandard and Special Mention residential loans increased $23.2 million, or 105.0%, commercial construction and land development loans increased $18.2 million, or 154.1%, and owner occupied commercial real estate increased $15.5 million, or 104.9%, These increases, which reflect the continued deterioration of the real estate market within our market areas, from their totals at December 31, 2009, can be attributed, in part, to the Bank’s decision in 2010 to enhance its Special Assets Department by adding additional staff and the resultant accelerated process of assessing debtor repayment capacity in addition to collateral coverage. A total of 40 loans with balances above $1.0 million totaling $71.4 million were included in criticized assets as of December 31, 2010, compared to 27 loans with balances greater than $1.0 million totaling $56.3 million as of December 31, 2009.

At December 31, 2010, other construction and land loans represented $61.1 million, or 34.4% of total criticized assets. Commercial real estate loans represented $60.6 million, or 34.0%, of total criticized assets as of December 31, 2010. Criticized commercial real estate loans is composed 51% income-producing commercial real estate, primarily office and retail space and the remaining 49% is comprised of owner-occupied commercial real estate.

Potential Problem Loans.Potential problem loans, which are not included in non-performing loans, amounted to approximately $4.2 million, or 0.6%, of total loans outstanding at December 31, 2010, compared to $17.1 million, or 2.2%, of total loans outstanding at December 31, 2009. Potential problem loans include impaired loans that are not TDRs and are still accruing. Potential problem loans represent those loans with a well-defined weakness which has caused management to have serious doubts about the borrower’s ability to comply with present repayment terms. The Bank had no loans with interest reserves outstanding at December 31, 2010.

Allowance for Loan Losses. The following table sets forth activity in our allowance for loan losses at the dates and for the periods indicated. See the Allowance for Loan Loss discussion in “– Allowance for Loan Losses,” on pagefor a discussion of management’s loan loss allowance methodology.

   At or for the years ended December 31, 
   2010  2009  2008  2007  2006 
   ( Dollars in thousands) 

Balance at beginning of period

  $17,772   $13,167   $9,520   $8,122   $6,583  

Charge-offs:

      

Real Estate:

      

One- to four-family residential

   3,218    3,057    613    1    163  

Commercial

   1,503    360    —      23    —    

Home equity loans and lines of credit

   3,473    2,479    565    146    —    

One- to four-family residential construction

   2,044    2,942    570    230    46  

Other construction and land

   9,646    9,751    605    —      —    

Commercial business

   582    478    113    55    —    

Consumer

   268    294    278    212    177  
                     

Total charge-offs

   20,734    19,361    2,744    667    386  
                     

Recoveries:

      

Real Estate:

      

One- to four-family residential

   153    198    2    —      42  

Commercial

   48    11     

Home equity loans and lines of credit

   251    22    23    8    50  

One- to four-family residential construction

   153    853    1    —      2  

Other construction and land

   525    943    52    —      —    

Commercial business

   65    19    16    1    4  

Consumer

   36    69    87    61    132  
                     

Total recoveries

   1,231    2,115    181    70    230  
                     

Net charge-offs

   19,503    17,246    2,563    597    156  

Provision for loan losses

   18,926    21,851    6,210    1,995    1,695  
                     

Balance at end of period

  $17,195   $17,772   $13,167   $9,520   $8,122  
                     

Ratios:

      

Net charge-offs to average loans outstanding

   2.61  2.17  0.31  0.07  0.02

Allowance for loan losses to non-performing loans at end of period

   22.75    40.67    30.27    165.11    188.23  

Allowance for loan losses to total loans at end of period

   2.40    2.30    1.61    1.15    1.02  

Our total allowance for loan losses declined by $0.6 million, or 3.25%, to $17.2 million at December 31, 2010, from $17.8 million at December 31, 2009. The Bank began recording partial charge-offs on loans in late 2010 and at that time recorded $6.1 million in partial charge-offs on collateral-dependent loans. For the year ended December 31, 2010, charge-offs for other construction and land development loans totaling $9.7 million, representing the largest loan charge-off category as the Bank charged off three large credits within this category totaling $3.5 million. The Bank also charged off $3.5 million of home equity loans and lines of credit, many of which were from a high loan-to-value loan program which was discontinued in 2008.

Our coverage ratio,i.e., our allowance for loan losses expressed as a percentage of non-performing loans, was 40.67% at December 31, 2009, compared to 30.27% at December 31, 2008 and 22.75% at December 31, 2010. Over the three-year period ending December 31, 2010, our coverage ratio reached a high of 40.67% at December 31, 2009, as we anticipated higher credit losses on increasing non-performing loans. As non-performing loans increased from $43.5 million to $43.7 million and $75.6 million at December 31, 2008, 2009 and 2010, respectively, provision expense increased from $6.2 million to $21.9 million and then to $18.9 million in 2008, 2009, and 2010, respectively.

Allocation of Allowance for Loan Losses.The following table provides details of the allowance for loan losses allocated by loan category at the dates indicated. The allowance for loan losses 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. Prior to 2009, our allowance methodology did not have any subcategories within real estate loans.

   At December 31, 
   2010  2009 
   Allowance for
Loan losses
   Percent of
Loans in each
Category to
Total loans
  Allowance for
Loan losses
   Percent of
Loans in each
Category to
Total loans
 
   (Dollars in thousands) 

Real estate loans:

       

One- to four-family residential

  $4,097     35.4 $3,820     31.6

Commercial

   4,206     28.0    3,146     25.4  

Home equity loans and lines of credit

   1,428     10.5    2,392     11.7  

One- to four-family residential construction

   540     2.2    878     3.7  

Other construction and land

   6,638     21.2    6,603     24.7  

Commercial business

   236     2.1    823     2.1  

Consumer

   50     0.6    110     0.8  
                   

Total allocated allowance

   17,195     100.0    17,772     100.0  

Unallocated

   —        —      
                   

Total

  $17,195     100.0 $17,772     100.0
                   
   At December 31, 
   2008  2007  2006 
   Allowance
for Loan
losses
   Percent
of Loans
in each
Category
to Total
loans
  Allowance
for Loan
losses
   Percent
of Loans
in each
Category
to Total
loans
  Allowance
for Loan
losses
   Percent
of Loans
in each
Category
to Total
loans
 
   (Dollars in thousands) 

Real estate loans

  $12,541     96.6 $8,046     96.1 $6,817     95.8

Commercial Business

   562     2.4    1,077     2.6    979     2.8  

Other loans

   64     1.0    397     1.3    326     1.4  
                            

Total allocated allowance

   13,167     100.0    9,520     100.0    8,122     100.0  

Unallocated

   —        —        —      
                            

Total

  $13,167     100.0 $9,520     100.0 $8,122     100.0
                            

The Bank computes its allowance either through a specific allowance to individually impaired loans or through a general allowance applied to homogeneous loans by loan type. The above allocation represents the allocation of the allowance by loan type of all loans regardless of specific or general calculations. The largest allocation proportionate to outstanding balances has been made to other construction and land loans and commercial real estate loans.

We review impaired loans individually to determine an appropriate allowance. When a loan or a portion of a loan is deemed a loss, we record a provision for the amount of the loss or charge-off the loss amount. The following table shows recorded loan balances, the unpaid principal balances, partial charge-offs, and specific allowances for impaired loans as of December 31, 2010. The table also shows the sum of the specific allowances and partial charge-offs expressed as a percentage of the unpaid principal balance.

   Recorded
Balance
   Unpaid principal
balance
   Partial
Charge-offs
   Specific
Allowance
   Specific allowance
And  partial charge-
offs divided by
Unpaid principal
Balance
 
   (Dollars in thousands) 

Loans without a specific valuation allowance

          

One- to four-family residential

  $7,072    $7,468    $396    $—       5.30

Commercial real estate

   5,011     5,125     114     —       2.22  

Home equity loans and lines of credit

   242     345     103     —       29.86  

One- to four-family residential construction

   2,372     2,938     566     —       19.26  

Other construction and land

   9,093     10,824     1,731     —       15.99  

Commercial loans

   1,161     1,188     27     —       2.27  
                         

Total

  $24,951    $27,888    $2,937    $—       10.53
                         

Loans with a specific valuation allowance

          

One- to four-family residential

   8,797     8,890     93     1,497     17.89  

Commercial real estate

   4,733     4,733     —       993     20.98  

Home equity loans and lines of credit

   387     387     —       189     48.84  

One- to four-family residential construction

   610     610     —       149     24.43  

Other construction and land

   13,344     14,816     1,472     2,099     24.10  
                         

Total

  $27,871    $29,436    $1,565    $4,927     22.05
                         

Total

          

One- to four-family residential

   15,869     16,358     489     1,497     12.14  

Commercial real estate

   9,744     9,858     114     993     11.23  

Home equity loans and lines of credit

   629     732     103     189     39.89  

One- to four-family residential construction

   2,982     3,548     566     149     20.15  

Other construction and land

   22,437     25,640     3,203     2,099     20.68  

Commercial loans

   1,161     1,188     27     —       2.27  
                         

Total

  $52,822    $57,324    $4,502    $4,927     16.45
                         

The above table indicates that the Bank charged off, or provided allowances for, amounts totaling 16.45% of the unpaid principal balances of all impaired loans as of December 31, 2010.

Real Estate Owned (REO). REO decreased $1.3 million, or 5.8%, to $21.5 million at December 31, 2010, from $22.8 million at December 31, 2009. During 2010, we disposed of 56 properties, realizing $12.8 million which included $10.5 million in net proceeds, and $4.6 million of loans originated for disposition of REO, less $2.3 million of sales costs. During 2010, $16.6 million was added to REO. Loss on REO during the period totaled $5.1 million. A breakdown of REO by type of property is shown in the following table.

   December 31,
2010
   December 31,
2009
   December 31,
2008
   December 31,
2007
   December 31,
2006
 
   (Dollars in thousands) 

One-to four-family improved properties

  $5,712    $6,487    $3,427    $1,077    $819  

Commercial real estate

   2,244     858     1,304     308     —    

Commercial land and land development

   10,200     11,572     209     —       146  

Residential lots

   3,355     3,912     591     813     686  
                         

Total

  $21,511    $22,829    $5,531    $2,198    $1,651  
                         

Our Commercial real estate loan category includes loans secured by commercial structures and commercial properties, with improvements under construction. Our commercial land and land development loan category includes acquisition and development loans and loans secured by unimproved commercial land.

Investment Securities. Our entire investment securities portfolio is classified as “available-for-sale” and is carried at fair value. The following table shows the amortized cost and fair value for our investment portfolio at the dates indicated.

   At December 31, 
   2010   2009   2008 
   Amortized
Cost
   Fair value   Amortized
Cost
   Fair value   Amortized
Cost
   Fair value 
   (Dollars in thousands) 

Investment securities available-for-sale:

            

U.S. Government and agency securities:

            

U.S. Government and agency obligations

  $32,213    $32,290    $2,497    $2,485    $23,786    $24,742  

U.S. Government structured agency obligations

   21,150     21,118     7,497     7,434     —       —    

Municipal obligations

   36,874     34,616     39,844     39,146     35,227     34,463  

Corporate bonds

   1,024     1,023     1,028     973     1,032     838  

Mortgage-backed securities:

            

U.S. Government agency sponsored mortgage-backed securities

   108,480     111,451     132,724     136,539     140,183     142,236  

SBA securities

   3,533     3,751     4,016     4,238     4,547     4,547  

Collateralized mortgage obligations

   12,056     12,021     2,295     2,258     1,654     1,658  

CRA investment fund

   526     527     508     504     —       —    
                              

Total securities available-for-sale

  $215,856    $216,797    $190,409    $193,577    $206,429    $208,484  
                              

   At December 31, 
   2007   2006 
   Amortized
Cost
   Fair value   Amortized
Cost
   Fair value 
   (Dollars in Thousands) 

Investment securities available-for-sale:

        

U.S. Government and agency securities:

        

U.S. Government and Agency obligations

  $55,267    $56,408    $49,727    $49,927  

U.S. Government structured Agency obligations

   —       —       —       —    

Municipal obligations

   28,852     28,472     16,346     16,407  

Corporate bonds

   1,035     1,045     —       —    

Mortgage-backed securities:

        

U.S. Government agency sponsored mortgage-backed securities

   47,895     47,649     61,852     61,242  

Small Business Administration securities

   3,099     3,043     3,977     3,945  

Collateralized mortgage obligations

   3,446     3,167     4,376     4,000  

CRA investment fund

   —       —       —       —    
                    

Total securities available-for-sale

  $139,594    $139,784    $136,278    $135,521  
                    

Investment securities increased $23.2 million, or 12.0%, to $216.8 million at December 31, 2010 from $193.6 million at December 31, 2009, primarily as a result of a decline in the demand for loans during the period.

We held investment securities with an amortized cost of $215.9 million and a fair value of $216.8 million at December 31, 2010, compared to an amortized cost of $190.4 million and a fair value of $193.6 million at December 31, 2009. Corporate bonds included one trust preferred security originally issued through Wachovia Bank (then First Union) with a Baa1 Moody’s rating as of December 31, 2010.

At December 31, 2010, gross unrealized losses on all investment securities totaled $2.7 million, while gross unrealized gains on all investment securities totaled $3.7 million. All losses during 2010 represented temporary impairments. At December 31, 2009, gross unrealized losses on all investment securities totaled $1.4 million and gross unrealized gains totaled $4.6 million.

At December 31, 2010, we held 58 securities in unrealized loss positions of less than one year. The net unrealized loss positions of the securities totaled $1.2 million. Of these, four were mortgage-backed securities and 54 were municipal securities. At that date we held 12 municipal securities with a total of $6.2 million in unrealized loss positions greater than one year. At December 31, 2010, all municipal securities were performing. Our municipal securities portfolio consists of approximately 83% of general obligation bonds and 17% of revenue bonds. One municipal security with a value of approximately $500,000 was rated by Moody’s as Baa1, and another, also valued at $500,000, was rated by Moody’s as Baa2. Of the 76 remaining municipal securities in our portfolio, 21 were not rated, and the remainder were rated A2 or better. The net unrealized loss position of all municipal securities totaled $2.3 million at December 31, 2010. All of these securities are performing. We do not intend to sell these securities nor is it more likely than not that we would be required to sell these securities before their anticipated collection dates. We believe the collection of the investment and related interest is probable. Based upon management’s analysis of each security with a greater than one year impairment, all of the unrealized losses represent temporary impairment losses. See Note 3 of the Notes to the Consolidated Financial Statements.

FHLB Stock. Our stock in the FHLB of Atlanta declined $1.3 million, or 10.7%, to $11.0 million at December 31, 2010, from $12.3 million at December 31, 2009. The amount of FHLB stock required to be owned by the Bank is determined by the amount of FHLB advances outstanding. The decline in our FHLB stock holding was the result of lower FHLB borrowings outstanding which declined from $178.4 million at December 31, 2009 to $128.4 million at December 31, 2010.

Other Assets. Other assets declined by $4.5 million, or 19.8%, to $18.5 million at December 31, 2010, from $23.0 million at December 31, 2009. The decline was attributable to a $4.6 million decline in deferred and current tax benefits, a $1.2 million decline in FDIC prepaid expenses, partially offset by a $1.2 million increase in miscellaneous other assets. Bank owned life insurance increased $0.6 million to $18.3 million from $17.7 million as a result of increase in cash value from earnings. Other assets at December 31, 2010, include $3.3 million in prepaid FDIC assessments, $2.5 million of mortgage loan servicing rights and $3.4 million of other assets.

Deposits.The following table presents average deposits by category, percentage of total average deposits and average rates for the periods indicated.

   For the years ended December 31, 
   2010  2009  2008 
   Average
Balance
   Percent  Weighted
Average
Rate
  Average
Balance
   Percent  Weighted
Average
Rate
  Average
Balance
   Percent  Weighted
Average
Rate
 
   (Dollars in thousands) 

Deposit type:

             

Savings accounts

  $19,134     2.4  0.33 $18,062     2.4  0.35 $18,418     2.7  0.52

Time deposits

   510,726     63.1    2.21    523,174     69.2    2.79    492,692     71.2    4.01  

Money market accounts

   162,642     20.1    1.46    103,705     13.7    1.86    67,611     9.8    2.59  

Interest-bearing demand accounts

   63,958     7.9    0.24    58,383     7.7    0.18    56,982     8.2    0.33  

Noninterest-bearing demand accounts

   53,435     6.6    —      52,646     7.0    —      56,602     8.2    —    
                               

Total deposits

  $809,895     100.0  1.71   $755,970     100.0  2.51   $692,305     100.0  3.15  
                               

   For the years ended December 31, 
   2007  2006 
   Average
Balance
   Percent  Weighted
Average
Rate
  Average
Balance
   Percent  Weighted
Average
Rate
 
   (Dollars in thousands) 

Deposit type:

         

Savings accounts

  $20,336     2.9  0.66 $22,832     3.4  0.66

Time deposits

   494,798     71.5    4.94    471,322     70.8    4.45  

Money market accounts

   54,019     7.8    3.19    50,657     7.6    3.18  

Interest-bearing demand accounts

   60,466     8.7    0.30    60,424     9.1    0.39  

Noninterest-bearing demand accounts

   62,293     9.0    —      60,693     9.1    —    
                     

Total deposits

  $691,912     100.0  3.83   $665,928     100.0  3.46  
                  

The following table presents details of the applicable interest rates on our certificates of deposit at the dates indicated.

   At December 31, 
   2010   2009   2008   2007   2006 
   (Dollars in thousands) 

Interest Rate:

          

Less than 2.00%

  $221,015    $107,203    $29,540    $967    $1,364  

2.00% to 3.99%

   247,387     374,454     429,285     40,783     47,283  

4.00% to 5.99%

   7,998     39,839     50,405     453,403     448,182  
                         

Total

  $476,400    $521,496    $509,230    $495,153    $496,829  
                         

Deposits increased by $8.0 million, or 1.0%, to $798.2 million at December 31, 2010 from $790.4 million at December 31, 2009. During this period, money market accounts increased $52.7 million, or 39.4%, to $186.6 million from $133.9 million, and savings accounts increased $1.3 million, or 7.2%, to $19.8 million from $18.5 million. These increases were offset partially by a $38.9 million, or 20.3%, decrease in brokered deposits, which fell to $152.9 million at December 31, 2010 from $191.8 million at December 31, 2009, and a $6.2 million, or 1.9%, decrease in retail certificates of deposit, which fell to $323.5 million at December 31, 2010 from $329.7 million at December 31, 2009. The increase in money market deposits resulted from a general market preference for shorter-term deposit instruments during the year. Brokered deposits which were $191.8 million at December 31, 2009 declined to $152.9 million at December 31, 2010. Internet deposits, which are more sensitive to market pricing, totaled $48.8 million, or 6.1% of total deposits, at December 31, 2010, and $35.3 million, or 4.5%, of total deposits, at December 31, 2009. Management uses internet deposits in the same manner as brokered deposits to manage liabilities, which may be available in a wider range of maturities than retail deposits.

Borrowings.The Bank has traditionally maintained a balance of borrowings from the FHLB of Atlanta, historically using a combination of fixed borrowings and fixed borrowings with an option for the FHLB to convert to variable rates at certain dates. All borrowings now carry fixed rates of interest. From time to time the Bank also borrows overnight funds from the FHLB of Atlanta but had no such overnight outstandings at December 31, 2010. FHLB advances are secured by qualifying one- to four-family permanent and commercial loans, by mortgage-backed securities, and by a blanket collateral agreement with the FHLB of Atlanta. The following table sets forth information concerning balances and interest rates on our FHLB advances at the dates and for the periods indicated.

   At or for the years ended December 31, 
   2010  2009  2008  2007  2006 
   (Dollars in thousands) 

Balance at end of period

  $128,400   $178,400   $238,400   $259,950   $183,500  

Average balance during period

   151,251    219,976    261,915    216,537    170,609  

Maximum outstanding at any month end

   178,400    238,400    288,750    262,500    185,000  

Weighted average interest rate at end of period

   3.85  3.92  3.79  4.60  4.57

Weighted average interest rate during period

   4.05    4.02    4.00    4.84    4.37  

FHLB advances declined $50.0 million, or 28.0%, to $128.4 million at December 31, 2010, from $178.4 million at December 31, 2009. Maturing advances were repaid as the demand for loans declined during 2010. The interest rates on these advances remained relatively constant in 2010 with the rates paid in 2009 due to borrowing rates being fixed during 2010 and 2009. See Note 10 of the Notes to the Consolidated Financial Statements.

The Bank maintains an approximately $41.0 million credit line with the FRB discount window. The Bank also from time to time uses repurchase agreements as a borrowing tool. The following table sets forth information concerning balances and interest rates for repurchase agreements and FRB borrowings at the dates and for the periods indicated.

   At or for the years ended December 31, 
   2010  2009  2008  2007  2006 
   (Dollars in thousands) 

Balance at end of period

  $—     $—     $40,000   $—     $10,000  

Average balance during period

   12    12,713    7,576    3,679    14,753  

Maximum outstanding at any month end

   —      —      45,000    —      15,000  

Weighted average interest rate at end of period

   —    —    0.50  —    —  

Average interest rate during period

   0.55    0.50    1.40    5.23    5.17  

Junior Subordinated Debentures.We had $14.4 million in a junior subordinated debenture outstanding at December 31, 2010, and 2009. See Note 11 of the Notes to Consolidated Financial Statements. This debenture accrues interest at a 2.80% spread above the 90-day LIBOR, adjusted quarterly. The effective interest rate was 3.10% and 3.06% at December 31, 2010 and December 31, 2009, respectively. Because of the dividend restrictions in the Bancorp MOU, we have been deferring payment of dividends on this debenture effective with the dividend due December 30, 2010.

Equity.Equity decreased $15.7 million, or 19.2%, to $66.0 million at December 31, 2010, from $81.6 million at December 31, 2009. The decrease resulted from a net loss of $14.3 million for the year ended December 31, 2010, and a $1.4 million decrease in other comprehensive income due to a decline in net unrealized gains on investments.

Comparison of Operating Results for the Three Months Ended March 31, 2011 and 2010.

General.Net loss increased $8.7 million to $8.9 million for the quarter ended March 31, 2011, from a $0.2 million net loss for the quarter ended March 31, 2010. During the quarter ended March 31, 2011, the Bank’s loan loss provision increased $6.0 million to $9.8 million from $3.8 million in the quarter ended March 31, 2010. Expense associated with ownership of REO increased $0.7 million to $0.8 million for the quarter ended March 31, 2011 from $0.1 million in the quarter ended March 31, 2010. Net gains on securities sold increased $0.8 million to $1.6 million during the 2011 first quarter from $0.8 million in the prior year’s first quarter. We sold investment securities and paid off higher rate FHLB advances prior to their scheduled maturity as we restructured our balance sheet. The FHLB prepayment penalty on this transaction totaled $1.4 million. Additionally, noninterest income declined $0.7 million during the first quarter of 2011, and no income tax benefit was recorded in 2011 compared to a $0.5 million income tax benefit over same period in 2010.

Net Interest Income.Net interest income is the difference between the interest income earned on interest-earning assets less interest expense on interest-bearing liabilities. Net interest income declined $0.9 million, or 13.4%, to $6.1 million in the quarter ended March 31, 2011, from $7.0 million in the quarter ended March 31, 2010. This decrease was primarily the result of lower yields earned and lower outstanding earning assets, which were partially offset by lower rates paid on interest-earning assets and lower outstanding interest-bearing liabilities.

The following tables set forth average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of yields and costs of interest expense on average interest-bearing liabilities, and the resulting annualized average tax-equivalent yields and costs for the periods indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but

have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.

   For the three months ended March 31, 
   2011  2010 
   Average
Outstanding
Balance
   Interest   Yield/Rate  Average
Outstanding
Balance
   Interest   Yield/Rate 
   (Dollars in thousands) 

Interest-earning assets:

           

Loans, including loans held for sale

  $700,070    $8,890     5.15 $762,686    $10,618     5.65

Investment and mortgage-backed securities - taxable

   164,552     1,012     2.49    156,906     1,491     3.85  

Investment securities - tax exempt (1)

   36,728     580     6.41    38,233     603     6.40  

FHLB stock, at cost

   10,979     22     0.81    12,288     8     0.26  

Interest-earning deposits

   26,210     7     0.11    28,403     6     0.09  
                       

Total interest-earning assets

   938,539     10,511     4.54    998,516     12,726     5.17  
                 

Noninterest-earning assets

   79,970        83,306      
                 

Total assets

  $1,018,509       $1,081,822      
                 

Interest-bearing liabilities:

           

Savings accounts

  $19,693    $15     0.31 $18,105    $15     0.34

Certificates of deposit

   473,537     2,420     2.07    524,008     3,052     2.36  

Money market accounts

   190,310     547     1.17    138,889     627     1.83  

Interest-bearing transaction accounts

   62,322     36     0.23    60,117     28     0.19  
                 

Total interest bearing deposits

   745,862     3,018     1.64    741,119     3,722     2.04  

FHLB advances

   116,300     1,110     3.87    169,400     1,678     4.02  

Junior subordinated debentures

   14,433     115     3.23    14,433     108     3.03  
                       

Total interest-bearing liabilities

   876,595     4,243     1.96    924,952     5,508     2.42  
                 

Noninterest-bearing deposits

   51,228        51,127      

Other non interest-bearing liabilities

   28,181        24,162      
                 

Total liabilities

   956,004        1,000,241      

Net worth

   62,505        81,581      
                 

Total liabilities and net worth

  $1,018,509       $1,081,822      
                 

Tax equivalent net interest income

    $6,268       $7,218    
                 

Tax equivalent net interest rate spread(2)

       2.58      2.75

Tax equivalent net interest-earning assets(3)

           

Tax equivalent net interest margin(4)

       2.71      2.93

Average interest-earning assets to interest-bearing liabilities

   1.07        1.08      

(1)Municipal securities are calculated giving effect to a 34% federal tax rate.
(2)Tax equivalent net interest rate spread represents the difference between the tax equivalent yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(3)Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(4)Tax equivalent net interest margin represents tax equivalent net interest income divided by average total interest-earning assets.

Our tax equivalent net interest rate spread declined by 0.17% to 2.58% for the three months ended March 31, 2011, from 2.75% for the three months ended March 31, 2010, and our net interest margin declined 0.22% over the same period to 2.71% from 2.93%. Average interest-earning assets declined $60.0 million to $938.5 million in the quarter ended March 31, 2011, compared to $998.5 million in the quarter ended March 31, 2010. Average loans represented the largest change, declining $62.6 million to $700.1 million in 2011 from $762.7 million in the first quarter of 2010, while loan yields declined 0.50% over the same period to 5.15% from 5.65%. Weak loan demand contributed to lower outstanding loans, and higher non-accruing loans outstanding and loan repricings to lower rates contributed to lower yields. Average balances on investment securities, which we used to replace loans, increased $7.7 million to $164.6 million in the first quarter of 2011, compared to $156.9 million in the first quarter of 2010. Taxable security yields by declined 1.36% to 2.49% for the first quarter, 2011, from 3.85% for the first quarter of 2010, as payoffs on mortgage-backed securities and exercised, callable features on other securities increased.

The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.

   For the three months ended March 31,
2011 vs. 2010
 
   Increase (decrease) due to  Total  increase
(Decrease)
 
   Volume  Rate  
   (Dollars in thousands) 

Interest-earning assets:

    

Loans (1)

  $(835 $(893 $(1,728

Investment securities—taxable

   70    (549  (479

Investment securities—tax exempt (2)

   (24  1    (23

FHLB stock dividends

   (1  15    14  

Interest-earning deposits

   —      1    1  
             

Total interest-earning assets

   (790  (1,425  (2,215
             

Interest-bearing liabilities:

    

Savings accounts

   1    (1  —    

Certificates of deposit

   (278  (354  (632

Money market accounts

   190    (270  (80

Demand and NOW accounts

   1    7    8  
             

Total deposits

   (86  (618  (704

FHLB advances

   (509  (59  (568

Junior subordinated debentures

   —      7    7  
             

Total interest-bearing liabilities

   (595  (670  (1,265
             

Change in net interest income

  $(195 $(755 $(950
             

(1)Non-accrual loans are included in the above analysis.
(2)Interest income on tax exempt securities is adjusted for a 34% federal tax rate

During the first quarter of 2011, lower interest expense on interest-bearing liabilities partially offset lower interest income. Lower interest income attributable to lower yields totaled $1.4 million, while lower interest expense attributable to lower rates paid on interest-bearing liabilities totaled $0.7 million. Lower loan and investment securities yields caused the decline in interest income for the quarter, and lower certificate of deposit and money market yields contributed to the decline in interest expense. FHLB advances had longer-term maturities during both years and contributed little to reducing interest expense.

Provision for Loan Losses.Provision for loan losses is the amount charged against earnings for establishing an adequate allowance for loan losses. The provision for loan losses was $9.8 million for the quarter ended March 31, 2011, which was an increase of $6.0 million from the $3.8 million recorded for the quarter ended March 31, 2010. This change was predominately due to greater net charge-offs which increased $2.7 million to $6.1 million in the first quarter of 2011, compared to $3.4 million in the first quarter of 2010. During the first quarter of 2011, the Bank recorded $3.1 million in charge-offs on two loans which were liquidated from short sales. Additional provisions were also taken as a result of continued weak real estate markets. Provision expense on criticized assets increased $2.4 million during the quarter and a general increase in provision expense for the allowance on impaired loans was made which increased the provision to 19.7% of all impaired loans from 16.5% at December 31, 2010.

Noninterest Income.Noninterest income increased $0.7 million, or 35.0%, to $2.7 million for the quarter ended March 31, 2011, from $2.0 million for the quarter ended March 31, 2010. Gains on the sale of securities increased $0.8 million to $1.6 million in the first quarter of 2011 from $0.8 million in the first quarter of 2010. Customer service fees declined $61,000 in the first quarter of 2011, as a result of lower deposit fees, and servicing income declined $25,000 as a result of the smaller servicing portfolio and higher amortization of servicing rights.

Noninterest Expense. Total noninterest expense increased $2.0 million to $7.9 million in the quarter ended March 31, 2011, compared to $5.9 million in the quarter ended March 31, 2010. We incurred a $1.4 million prepayment expense on the early repayment of FHLB fixed rate advances in the first quarter of 2011 as part of an asset restructuring transaction. REO expenses incurred to maintain foreclosed properties increased $0.7 million to $0.8 million in the first quarter of 2011, compared to $0.1 million in the first quarter of 2010. Included in this increase of REO expenses is $240,000 for marketing related expenses on the sale of a land development property that took place in the second quarter of 2011. Also included in REO expenses in the first quarter of 2011 is $180,000 in legal costs and $97,000 of real estate property taxes.

Income Tax Expense.The Bank had no income tax benefit in the 2011 first quarter on a $8.9 million pre-tax loss, compared with a $0.5 million benefit in the first quarter of 2010 on a $0.7 million pre-tax loss. During the first quarter of 2011, the Bank recorded a valuation allowance against deferred taxes for the full amount of the income tax benefit. The effective tax rate was 66.2% for the 2010 first quarter.

Comparison of Operating Results for the Fiscal Years Ended December 31, 2010 and 2009.

General.Net loss increased $6.5 million, or 83.1%, to $14.3 million for the year ended December 31, 2010 compared to a $7.8 million net loss for the year ended December 31, 2009. The increased loss in 2010 was primarily due to a $3.7 million income tax expense during the year, compared to a $6.1 million income tax benefit in the year ended December 31, 2009. In 2010 we recorded a $8.5 million deferred tax valuation allowance based on cumulative net losses over the past three years and management’s assessment of future earnings. The Bank’s loan loss provision declined $3.0 million, or 13.4%, in 2010 to $18.9 million from $21.9 million in 2009. Losses on REO, which includes property valuation write-downs and losses on sales, declined $3.6 million, or 41.0%, in 2010 to $5.1 million from $8.7 million in 2009. Additionally, net interest income declined $3.0 million and noninterest income declined $1.6 million over the same period.

Net Interest Income.Net interest income is the difference between interest income earned on interest-earning assets less interest expense on interest-bearing liabilities. Net interest income decreased by $3.0 million, or 10.1%, to $26.9 million for the year ended December 31, 2010, from $29.9 million for the year ended December 31, 2009. Our tax equivalent net interest rate spread and net interest margin were 2.61% and 2.77%, respectively, for the year ended December 31, 2010, compared to 2.70% and 2.95%, respectively, for the year ended December 31, 2009. The decline in net interest income resulted from a shift in the mix of interest-earning assets as the volume of higher earning loans and their corresponding yields declined during 2010. Investment securities, primarily U.S. Government and agency obligations, were the primary earning asset replacement for the loss of higher earning loans during the year ended December 31, 2010. The yields on these replacement securities were lower than the yields on the mortgage loans they replaced and the yields obtained in 2009 on our taxable investment securities portfolio.

The following tables set forth average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average tax-equivalent yields and costs for the periods indicated.All average balances are daily average balances.Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.

  For the twelve months ended December 31, 
  2010  2009  2008 
  Average
Outstanding
Balance
  Interest  Yield/Rate  Average
Outstanding
Balance
  Interest  Yield/Rate  Average
Outstanding
Balance
  Interest  Yield/Rate 
  (Dollars in thousands) 

Interest-earning assets:

         

Loans, including loans held for sale

 $747,332   $40,653    5.44 $794,338   $46,744    5.88 $815,158   $55,110    6.76

Investment and mortgage-backed securities - taxable

  175,679    5,046    2.87    169,818    7,570    4.46    130,616    6,866    5.26  

Investment securities - tax exempt (1)

  37,213    2,352    6.32    39,222    2,479    6.32    33,597    2,138    6.36  

FHLB stock, at cost (2)

  11,865    41    0.35    12,312    37    0.30    13,654    516    3.78  

Interest earning deposits

  25,412    34    0.13    28,689    48    0.17    32,842    807    2.46  
                           

Total interest-earning assets

  997,501    48,126    4.82    1,044,379    56,878    5.45    1,025,867    65,437    6.38  

Noninterest-earning assets

  82,117      72,453      58,952    
                  

Total assets

 $1,079,618     $1,116,832     $1,084,819    
                  

Interest-bearing liabilities:

         

Savings accounts

 $19,134   $64    0.33 $18,062   $63    0.35 $18,418   $95    0.52

Certificates of deposit

  510,726    11,282    2.21    523,174    14,591    2.79    492,692    19,771    4.01  

Money market accounts

  162,642    2,367    1.46    103,708    1,926    1.86    67,611    1,748    2.59  

Interest bearing transaction accounts

  63,958    152    0.24    58,383    104    0.18    56,982    187    0.33  
                  

Total interest bearing deposits

  756,460    13,865    1.83    703,327    16,684    2.37    635,703    21,801    3.43  

FHLB advances

  151,251    6,130    4.05    219,976    8,837    4.02    261,915    10,483    4.00  

Short term borrowings

  12    —      —      12,713    64    0.50    7,576    106    1.40  

Junior subordinated debentures

  14,433    456    3.16    14,433    530    3.67    14,433    906    6.28  
                           

Total interest-bearing liabilities

  922,156    20,451    2.22    950,449    26,115    2.75    919,627    33,296    3.62  
                  

Noninterest-bearing deposits

  53,435      52,646      56,602    
         

Other non interest bearing liabilities

  24,736      25,433      24,445    
                  

Total liabilities

  1,000,327      1,028,528      1,000,674    

Net worth

  79,291      88,304      84,145    
                  

Total liabilities and net worth

 $1,079,618     $1,116,832     $1,084,819    
                  

Tax equivalent net interest income

  $27,675     $30,763     $32,141   
                  

Tax equivalent net interest rate spread(3)

    2.61    2.70    2.76

Net interest-earning assets(4)

 $75,345     $93,930     $106,240    
                  

Tax equivalent net interest margin(5)

    2.77    2.95    3.13

Average interest-earning assets to interest-bearing liabilities

  1.08      1.10      1.12    

(1)Municipal securities are calculated giving effect to a 34% federal tax rate.
(2)FHLB stock dividends have been increased by $15 thousand in 2009 and decreased by $15 thousand in 2008 to give effect for a 2008 over-accrual of dividends which was adjusted in 2009.
(3)Tax equivalent net interest rate spread represents the difference between the tax equivalent yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(4)Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(5)Tax equivalent net interest margin represents tax equivalent net interest income divided by average total interest-earning assets.

The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.

   For the years ended December 31,  For the years ended December 31, 
   2010 vs. 2009  2009 vs. 2008 
   Increase (decrease) due to  Total  increase
(Decrease)
  Increase (decrease) due to  Total  increase
(Decrease)
 
   Volume  Rate   Volume  Rate  
   (Dollars in thousands) 

Interest-earning assets:

       

Loans (1)

  $(2,674 $(3,417 $(6,091 $(1,374 $(6,992 $(8,366

Investment securities—taxable

   253    (2,777  (2,524  1,851    (1,147  704  

Investment securities—tax exempt (2)

   (127  —      (127  356    (15  341  

FHLB stock dividends

   (1  5    4    (46  (433  (479

Interest-earning deposits

   (5  (9  (14  (90  (669  (759
                         

Total interest-earning assets

   (2,554  (6,198  (8,752  697    (9,256  (8,559
                         

Interest-bearing liabilities:

       

Savings accounts

   4    (3  1    (2  (30  (32

Certificates of deposit

   (340  (2,969  (3,309  1,158    (6,338  (5,180

Money market accounts

   923    (482  441    760    (582  178  

Demand and NOW accounts

   11    37    48    4    (87  (83
                         

Total deposits

   598    (3,417  (2,819  1,920    (7,037  (5,117

FHLB advances

   (2,785  78    (2,707  (1,685  39    (1,646

Securities sold under agreements to repurchase

   (32  (32  (64  48    (90  (42

Junior subordinated debentures

   —      (74  (74  —      (376  (376
                         

Total interest-bearing liabilities

   (2,219  (3,445  (5,664  283    (7,464  (7,181
                         

Change in net interest income

  $(335 $(2,753 $(3,088 $414   $(1,792 $(1,378
                         

(1)Non-accrual loans are included in the above analysis.
(2)Interest income on tax exempt securities is adjusted for a 34% federal tax rate

Our tax equivalent net interest income declined $3.1 million in 2010, as a result of lower average earning assets and a lower average yield. Average earning assets declined $46.9 million, or 4.5%, to $997.5 million in 2010 compared to $1,044.4 million in 2009. The average yield on earning assets also declined to 4.82% in 2010 from 5.45% in 2009, a 12% decrease. Lower tax equivalent yield was the largest contributing factor to lower interest income, accounting for $6.2 million of the decline.

Interest and fees on loans decreased $6.0 million, or 13.1%, to $40.7 million for the year ended December 31, 2010, from $46.7 million for year ended December 31, 2009. The average yield on loans receivable decreased to 5.44% for the year ended December 31, 2010, from 5.88% for the year ended December 31, 2009. The decrease in yield was attributable to a continued low interest rate environment and a higher level of non-accruing loans, which totaled $60.5 million at December 31, 2010, compared to $21.4 million at December 31, 2009. Total loan interest income was also lower in 2010 as a result of lower average loan balances outstanding during the year, which were $747.3 million, compared to $794.3 million in 2009. This decrease was primarily attributable to continued weak loan demand throughout our market areas.

Interest income on taxable investment securities decreased by $2.6 million, or 33.3%, to $5.0 million for the year ended December 31, 2010, from $7.6 million for the year ended December 31, 2009. This decrease was due primarily to a decrease in the average yield earned which declined to 2.87% in 2010 from 4.46% in 2009. The average yield declined as balances in higher yielding mortgage-backed securities declined during the year as a result of borrower repayments and issuer calls being exercised. Of the $103.3 million of securities sold or called during 2010, $51.4 million were sold, as we continued to restructure our portfolio to meet our asset/liability objectives. The remaining $51.9 million were called which reduced our overall investment yield. In the total taxable portfolio, loss of income from the decline in yield was partially offset by an increase in average outstanding investments which averaged $175.7 million in 2010, compared to $169.8 million in 2009. Management increased the Bank’s taxable securities portfolio during the year to replace earning assets as loans declined.

FHLB stock dividends increased to $41,000 during 2010 from $22,000 in 2009, as the FHLB of Atlanta resumed payment of dividends.

Total interest expense decreased by $5.7 million, or 21.7%, to $20.4 million for the year ended December 31, 2010, from $26.1 million for the year ended December 31, 2009. This decrease in interest expense was due to a decrease in the average cost of interest-bearing liabilities, declining to 2.22% from 2.75%, and also from a $28.2 million decrease in the average balance of interest-bearing liabilities to $922.2 million in 2010 from $950.4 million in 2009, as funding needs for earning assets declined.

Our interest expense on deposits decreased by $2.8 million, or 16.9%, to $13.9 million for the year ended December 31, 2010, from $16.7 million for the year ended December 31, 2009. This reduced interest expense on deposits was primarily the result of a decrease in interest expense on certificates of deposit of $3.3 million or 22.7% as some higher cost certificates were allowed to mature in 2010 without aggressive repricing, which resulted in a lower overall interest rate paid on certificates of deposit. Partially offsetting this decrease in certificates of deposit interest expense was an increase in money market account interest expense of $0.4 million in 2010 compared to 2009, as average balances increased by $58.9 million during 2010 to $162.6 million while the average rate paid decreased by 0.40%. During 2010, customers increasingly preferred short-term deposits compared to longer term certificates.

FHLB advance interest expense declined by $2.7 million, or 30.6%, to $6.1 million in 2010 compared to $8.8 million in 2009 as a result of $68.7 million in lower average balances outstanding. Interest rates on advances remained relatively unchanged during the two years, averaging 4.05% in 2010 and 4.02% in 2009, as many of the rates of individual borrowings were fixed.

Provision for Loan Losses. The provision for loan losses is the amount charged against earnings for the purpose of establishing an adequate allowance for loan losses. Our provision for loan losses decreased by $3.0 million, or 13.4%, to $18.9 million for the year ended December 31, 2010, from $21.9 million for the year ended December 31, 2009. The provision for loan losses as a percentage of net charge-offs totaled 97.0% and 126.7% at December 31, 2010 and 2009, respectively. Total net charge-offs were $19.5 million and $17.2 million in 2010 and 2009, respectively. The provision for loan losses in 2010 remained elevated as a result of continuing weaknesses in local real estate markets which has resulted in substantially higher levels of non-performing loans and downgrades to credit ratings within our loan portfolio.

Noninterest Income.Noninterest income decreased $1.6 million, or 19.3%, to $6.7 million for the year ended December 31, 2010, from $8.3 million for the year ended December 31, 2009. Gains on sales of mortgage loans declined $1.7 million, or 59.1%, to $1.1 million in 2010 from $2.8 million in 2009. This resulted from lower mortgage loan activity caused by reduced loan demand and more stringent Fannie Mae underwriting standards reducing the pool of qualified borrowers. Total loans sold declined by $64.7 million, or 63.3%, to $37.5 million during 2010 from $102.2 million in 2009. Customer service fees were also lower by $249,000 as a result of lower deposit fees on customer accounts and lower miscellaneous loan fee income. These declines were offset by a $249,000 increase in gains on securities sold, and a $342,000 increase in loan servicing income.

Noninterest Expense.Noninterest expense declined by $5.0 million, or 16.6%, to $25.2 million for the year ended December 31, 2010, from $30.2 million for the year ended December 31, 2009. Losses incurred on REO represented the largest change, declining by $3.6 million, or 41.0%, to $5.1 million for the year ended December 31, 2010, from $8.7 million for the year ended December 31, 2009. Losses on REO result from ongoing valuation write-downs on properties while held as REO, and from losses, incurred on sales of REO for less than the then book value of the individual properties.

Expenses are also incurred in maintaining properties held in REO. REO expenses increased by $132,000, or 17.9%, rising to $870,000 in 2010 compared to $738,000 in 2009.

Compensation and employee benefits expense declined by $600,000, or 5.1%, to $10.4 million in the year ended December 31, 2010, compared to $11.0 million in the year ended December 31, 2009. This decrease resulted primarily from a $303,000 decline in incentive commissions and referrals expense related to our mortgage originations business and a $135,000 decline in retirement benefits expense. Our number of full-time equivalent employees also declined during 2010 and 2009. We had 189 full-time equivalent employees at the beginning of 2009, and 179 and 175 full-time equivalent employees at the end of 2009 and 2010, respectively.

FDIC deposit insurance expense declined by $0.4 million, or 23.6%, during 2010, to $1.4 million from $1.8 million in 2009. In 2009 we paid a special assessment to the FDIC in the sum of $510,000. However, we also experienced higher assessment rates in 2010.

Other expense declined by $0.7 million, or 17.4%, to $3.1 million in the year ended December 31, 2010, from $3.8 million in the year ended December 31, 2009. Advertising and marketing expense reflected the largest decline in other expense declining $346,000 during 2010, while legal fees declined $146,000 primarily as a result of lower expense in 2010 on a lawsuit in which the Bank is a plaintiff. Loan expense also declined $50,000 as a result of reduced mortgage loan production during 2010. The year ended December 31, 2009 also included a non-recurring $50,000 write-off of an investment in the stock of a correspondent bank, which became insolvent.

Income Tax Expense.We recorded a $3.7 million income tax expense in our income tax provision for the year ended December 31, 2010. The primary reason for this expense was a $7.8 million deferred tax expense which resulted mainly from an $8.5 million valuation allowance against our deferred tax assets. The decision to record a valuation allowance was based on recent performance and management’s assessment of future earnings. See “– Deferred Tax Assets” on page. As of December 31, 2010, we had a net cumulative loss position for three consecutive years. For the year ended December 31, 2009, we recorded a $6.1 million tax benefit. We had a 2009 net pre-tax operating loss of $13.9 million.

Management of Market Risk

General. One of the most significant forms of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our net interest income to changes in market interest rates. The Board of Directors of the Bank has established an Asset/Liability Management Committee (“ALCO Committee”), which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistently with the guidelines approved by the Board.

Historically, we have operated as a traditional savings institution with the majority of our assets consisting of mortgage loans and investment securities. Of our investment securities, mortgage-backed securities are the largest portion, which represented 59.1% of all securities at March 31, 2011. We sell our long-term fixed rate mortgages in secondary markets obtaining commitments to sell at locked-in rates prior to issuing a loan commitment. We have used wholesale funding, particularly FHLB advances and brokered certificates of deposits, to fund loan portfolio growth when retail core deposits did not meet all of our funding and maturity matching needs. Management reduced these wholesale funding balances in 2009 and 2010 as funding needs declined. We expect to fund future funding requirements primarily with retail deposits, including checking and savings accounts, money market accounts and certificates of deposit generated within our markets. Deposits, exclusive of brokered and internet deposits, increased to $613.2 million at March 31, 2011, from $596.7 million at December 31, 2010. Brokered deposits declined $32.7 million, or 21.4%, to $120.2 million at March 31, 2011, from $152.9 million at December 31, 2010.

In addition to the above strategies with respect to our lending activities, we have taken the following steps to reduce our interest rate risk:

increased our personal and business checking accounts and our money market accounts, which are less rate-sensitive than certificates of deposit and which provide us with a stable, low-cost source of funds;

utilized our securities portfolio for positioning based on projected rate environments;

utilized Internet Rate Board positioning to attract certificates of deposits funding at our desired terms and rates; and

repaid higher-cost short-term borrowings.

We have not conducted hedging activities, such as engaging in futures, options or swap transactions. In addition, changes in interest rates can affect the fair values of our financial instruments. During the year ended December 31, 2010, the fair value of our loan portfolio more closely approximated book value compared to a wider positive spread between fair value and book value at December 31, 2009. This resulted from a larger percentage of fixed rate loans in the portfolio at December 31, 2010, when compared to the prior year end. For additional information, see Note 18 of the Notes to the Consolidated Financial Statements.

Net Portfolio Value.The table below sets forth, as of March 31, 2011, the estimated changes in our net portfolio value (“NPV”) that would result from the designated instantaneous changes in the interest rate yield curve. The NPV is the difference between the present value of an institution’s assets and liabilities (the institution’s NPV) that would change in the event of a range of assumed changes in market interest rates. The simulation model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of NPV. The model estimated the economic value of each type of asset, liability and off-balance sheet contract using the current interest rate yield curve with instantaneous increases or decreases of 100 to 300 basis points in 100 basis point increments. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below. Given the current relatively low level of market interest rates, an NPV calculation for an interest rate decrease of greater than 100 basis points has not been prepared.

      NPV as a percentage of present
Value of assets (3)
 

Change in interest

Rates (basis

points) (1)

  Estimated
NPV (2)
  Estimated increase (decrease) in
NPV
  NPV ratio (4)  Increase  (decrease)
Percent
 
  Amount  Percent   
(Dollars in thousands) 
 +300   $51,795   $(24,129  (28.53)%   96.93  (3.07)% 
 +200    60,458    (19,057  (22.53  94.09    (5.91
 +100    71,853    (12,734  (15.05  91.72    (8.28
 0    84,587    —      —      —      —    
 -100    91,252    6,665    7.88    102.64    2.64  

(1)Assumes interest rate changes (up and down) in increments of 100 basis points.
(2)NPV is the discounted present value of expected cash flows from assets and liabilities.
(3)Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
(4)NPV Ratio represents NPV divided by the present value of assets.

The table above indicates that at March 31, 2011, in the event of a 200 basis point increase in interest rates, we would experience a 22.53% decrease in NPV. In the event of a 100 basis point decrease in interest rates, we would experience a 7.88% increase in NPV.

Certain shortcomings are inherent in the methodologies used in determining interest rate risk through changes in NPV. Modeling changes in NPV require making certain assumptions that may or may not reflect the manner in which actual yields and costs, or loan repayments and deposit decay, respond to changes in market interest rates. In this regard, the NPV tables presented 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 assumes that a particular change in interest rates is reflected across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the NPV tables 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.

Net Interest Margin. In addition to an NPV analysis we analyze the impact of changing rates on our net interest margin. Using our balance sheet as of a given date, we analyze the repricing components of individual assets, and adjusting for changes in interest rates at 100 basis point increments, we analyze the impact on our net interest margin. Changes to our margin are shown in the following table based on immediate changes to interest rates in 100 basis point increments.

Impact of interest rate changes on net interest margin

 
At March 31, 2011 
(Dollars in thousands) 

Change in

Basis points

  

Net interest income

(Annualized)

  $ Change  % Change 
 +300   $29,480    707    2.46 
 +200    28,843    70    0.24  
 +100    28,597    (176  (0.61
 0    28,773    —      —    
 -100    27,773    (1,000  (3.48

The above table indicates that an immediate increase in interest rates would result in a slight decline in net interest margin, and an improved net interest margin as rates increase above 200 basis points.

Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations. Our primary sources of funds consist of deposit inflows, loan repayments, advances from the FHLB of Atlanta, repurchase agreements and maturities, proceeds from the sale of loans originated for sale, principal repayments and the sale of available-for-sale securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Our Asset/Liability Management Committee, under the direction of our Chief Financial Officer, is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we have enough sources of liquidity to satisfy our short- and long-term liquidity needs as of March 31, 2011. We anticipate that we will maintain higher liquidity levels following the completion of the offering.

We regularly monitor and adjust our investments in liquid assets based upon our assessment of expected loan demand, expected deposit flows and borrowing maturities, yields available on interest-earning deposits and securities, and the objectives of our asset/liability management program.

Excess liquid assets are invested generally in FHLB interest-earning deposits and investment securities and are also used to pay off short-term borrowings and, in 2010 and the first quarter of 2011, brokered deposits.

Our most liquid assets are cash and cash equivalents. The level of these assets is dependent on our operating, financing, lending and investing activities during any given period. At March 31, 2011, cash and cash equivalents totaled $20.3 million. Included in this total is $14.5 million held at the FHLB of Atlanta in interest-earning assets. The Bank from time to time invests deposits in FDIC insured banks, however, at March 31, 2011, and December 31, 2010 and 2009, the Bank had no deposits in excess of insured limits. At March 31, 2011, the Bank had one $400,000 deposit with a National Credit Union Administration-insured credit union, which also has an insured limit of $250,000.

Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Consolidated Statements of Cash Flows included in our Consolidated Financial Statements.

At March 31, 2011, we had $0.3 million in outstanding commitments to originate mortgage loans. In addition to commitments to originate mortgage loans, we had $72.7 million in unused lines of credit for home equity loans and $2.7 million for consumer and other lines. Certificates of deposit due within one year of March 31, 2011, totaled $199.7 million, or 25.5% of deposits. Management does not plan to increase its levels of brokered deposits from March 31, 2011 totals and will reduce those balances as they mature through the use of current liquidity sources which include cash on hand, loan repayments, and investment securities maturities.

Depending on market conditions, we may be required to pay higher rates on our deposits or other borrowings than we currently pay on certificates of deposit due on or before March 31, 2012. We believe, however, based on historical experience and current market interest rates, that we will retain upon maturity a large portion of our retail certificates of deposit with maturities of one year or less as of March 31, 2011.

Our primary investing activity is originating loans. During the quarter ended March 31, 2011, and the years ended December 31, 2010, 2009, and 2008, we had a net increase (decrease) in loans of ($16.4) million, ($25.4) million, $13.2 million, and ($28.1) million, respectively. During these periods, the Bank acquired REO in satisfaction of loans of $6.1 million, $16.5 million, $46.6 million and $7.2 million, respectively. The Bank received sales proceeds, net of funds used to improve REO, of $1.5 million, $7.2 million, $13.9 million, and $1.9 million on subsequent REO sales, during these respective periods.

In addition to loans, we invest in securities that provide a source of liquidity, both through repayments and as collateral for borrowings. Since the portfolio is comprised of both callable securities which allow for issuer call options, and mortgage-backed securities which allow for customer prepayments, declines in interest rates would likely produce higher early cash flows. Higher customer repayments, maturities, and calls in the quarter ended March 31, 2011, and the years ended 2010 and 2009 of $28.8 million, $43.2 million and $54.3 million, respectively, reflected the decline in interest rates compared to $17.0 million in 2008, when interest rates were higher. For the quarter ended March 31, 2011, and the three years ended December 31, 2010, 2009 and 2008, we had net increases (decreases) in securities of ($61.8) million, $26.0 million, ($14.8) million and $66.3 million, respectively as we generally replaced declining loan balances with securities. During the quarter ended March 31, 2011, the Bank sold $59.2 million in investment securities and with those funds paid off $42.5 million in FHLB advances prior to their scheduled maturity, primarily to reduce total assets and improve the Bank’s capital ratios.

Financing activities consist primarily of activity in deposit accounts and FHLB advances. We experienced a net increase (decrease) in deposits of ($16.3) million, $8.1 million, $74.5 million, and $40.3 million during the quarter ended March 31, 2011, and the years ended December 31, 2010, 2009 and 2008, respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our competitors, and by our need to fund earning assets.

Liquidity management is both a daily and long-term function of management. If we require more funds than we are able to generate locally, we have borrowing agreements with the FHLB of Atlanta, which provide an additional source of funds. We have also utilized securities sold under agreements to repurchase as another borrowing source. FHLB advances decreased by $62.5 million, $50.0 million, $60.0 million and $21.6 million during the quarter ended March 31, 2011, and the years ended December 31, 2010, 2009 and 2008, respectively, as overall demand for loans declined. At March 31, 2011, we had $121.9 million of collateral in place at the FHLB, consisting of eligible loans and securities. This provided excess available credit of $30.9 million. At March 31, 2011, the Bank had $127.6 million in unpledged securities.

We have not used the FRB discount window since November, 2009. We had $40.0 million in FRB discount window borrowings outstanding at December 31, 2008 which were repaid in 2009. At December 31, 2010, we had an available line of credit with the FRB discount window of approximately $41.0 million.

The Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based guidelines and framework under prompt corrective action provisions include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At March 31, 2011 the Bank’s Tier I Capital Leverage ratio was 7.07% and its Total Risk-Based Capital ratio was 11.55%, compared to 5% and 10%, respectively, as required under the prompt corrective action provisions. Under the Bank MOU, the Bank is required to maintain a Tier I Leverage Capital ratio of not less than 8% and a Total Risk-Based Capital ratio of not less than 12%. See “” on pageand Note 14 of the Notes to the Consolidated Financial Statements regarding regulatory capital levels.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Commitments.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 represent our potential future cash requirements, a significant portion of 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, see Note 15. Commitments and Contingencies of the Notes to the Consolidated Financial Statements.

Contractual Obligations.In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities and agreements with respect to investments.

The following table summarizes our significant fixed and determinable contractual obligations and other funding needs by payment date at December 31, 2010. The payment amounts represent those amounts due to the recipient and do not include any unamortized premiums or discounts or other similar carrying amount adjustments.

   Payments due by period
At December 31, 2010
 

Contractual Obligations

  One year or
less
   More than
one year to
three years
   More than
three years to
five years
   More than
five years
   Total 
   (Dollars in thousands) 

Borrowings

  $40,000    $63,400    $10,000    $15,000    $128,400  

Junior subordinated debentures

   —       —       —       14,433     14,433  

Operating leases

   55     56     9     —       120  

Non qualified compensation programs

   1,407     2,306     1,490     5,967     11,170  
                         

Total

  $41,462    $65,762    $11,499    $35,400    $154,123  
                         

All borrowings referenced in the above table are FHLB advances. Operating lease amounts represent leases on two branch offices, Saluda and Henderson Eastside. Non-qualified compensation programs are for existing plans for the benefit of our employees and directors.

Recent Accounting Pronouncements

In January 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-04,Accounting for Various Topics – Technical Corrections to SEC Paragraphs. ASU 2010-04 makes technical corrections to existing SEC guidance including the following topics: accounting for subsequent investments, termination of an interest rate swap, issuance of financial statements — subsequent events, use of residential method to value acquired assets other than goodwill, adjustments in assets and liabilities for holding gains and losses, and selections of discount rate used for measuring defined benefit obligation. ASU 2010-04 is effective January 15, 2010. The adoption of this guidance did not have a material impact on our financial conditions, results of operations or liquidity.

In January 2010, the FASB issued ASU No. 2010-06,Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this guidance does not have a significant impact on our financial conditions, results of operations or liquidity.

In December 2010, the FASB issued ASU 2010-11,Derivatives and Hedging. ASU 2010-11 provides clarification and related additional examples to improve financial reporting by resolving potential ambiguity about the breadth of the embedded credit derivative scope exception in Accounting Standards Codification (“ASC”) Topic 815-15-15-8. ASU 2010-11 is effective at the beginning of the first fiscal quarter beginning after June 15, 2010. The adoption of this guidance did not have a significant impact on our financial conditions, results of operations or liquidity.

In July 2010, the FASB issued ASU 2010-20,Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The new disclosure guidance significantly expands the existing requirements and will lead to greater transparency into a company’s exposure to credit losses from lending arrangements. The extensive new disclosures of information as of the end of a reporting period will become effective for both interim and annual reporting periods ending on or after December 15, 2010. Specific disclosures regarding activity that occurred before the issuance of the ASU, such as the allowance roll-forward and modification disclosures will be required for periods beginning on or after December 15, 2010. We have included the required disclosures in our Consolidated Financial Statements.

In January 2011, the FASB issued ASU 2011-01,Receivables (Topic 310): Disclosures about Credit Quality of Financing Receivables and the Allowances for Credit Losses, which deferred the effective date of disclosures by public companies about TDRs as issued in its ASU 2010-20 disclosure guidance. The delay is intended to allow FASB time to complete its deliberations on what constitutes a TDR. The guidance is anticipated to be effective for interim and annual reporting periods after June 15, 2011.

In April, 2011, the FASB issued ASU 2011-02,A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. In an effort to increase comparability, ASU 2011-02 seeks to clarify when a creditor has granted a concession in a modification and whether a borrower is experiencing financial difficulty. The amendments in this update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The provisions of ASU 2011-02 are not expected to have a material impact on our financial condition, results of operations or liquidity.

Impact of Inflation and Changing Prices

Our Consolidated Financial Statements and related notes have been prepared in accordance with GAAP. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration of changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.

OUR BUSINESS

The Companies

Macon Financial.This offering is being made by Macon Financial, a newly formed North Carolina corporation, that will own all of the outstanding shares of common stock of Macon Bank upon completion of this offering and the mutual-to-stock conversion of Macon Bancorp. Other than matters of an organizational nature, Macon Financial has not engaged in any business to date. Following the conversion and the offering, Macon Financial will be renamed “Macon Bancorp”.

Macon Bancorp.Macon Bancorp is a North Carolina chartered mutual holding company headquartered in Franklin, North Carolina. It was organized in 1997, when the Bank converted from a mutual savings bank to a stock savings bank, and owns 100% of the outstanding shares of common stock of the Bank. Bancorp also has one non-bank subsidiary, Macon Capital Trust I, a Delaware statutory trust, formed in 2003 to facilitate the issuance of trust preferred securities. On a consolidated basis, as of March 31, 2011, Bancorp had total assets of $932.8 million, total loans of $667.7 million, total

deposits of $782.1 million and total equity of $56.3 million. As a mutual holding company, Bancorp has no shareholders and is controlled by the depositors and borrowers of the Bank.

Pursuant to the terms of our plan of conversion, Macon Bancorp will merge with and into Macon Financial and, in doing so, will convert from a mutual form of organization to a stock form of organization. Upon the completion of the conversion, Bancorp will cease to exist, and the Bank will become a wholly-owned subsidiary of Macon Financial which will be renamed “Macon Bancorp”.

Macon Bank. Macon Bank is a North Carolina chartered stock savings bank headquartered in Franklin, North Carolina. It was organized in 1922, as a North Carolina chartered mutual savings and loan association. In 1992, it converted to a North Carolina chartered mutual savings bank. In 1997, upon the formation of Bancorp, it converted to a North Carolina chartered stock savings bank.

Our Executive Offices.Our executive offices are located at 220 One Center Court, Franklin, North Carolina 28734 and the telephone number at this address is (828) 524-7000. Our website address iswww.maconbank.com. Information on our website is not incorporated into this prospectus and should not be considered part of this prospectus.

General

Overview.The Bank was organized as a mutual savings and loan association. As a mutual savings and loan association or “thrift,” the Bank’s primary purpose was to promote home ownership through mortgage lending, financed by locally gathered deposits. Surviving the Great Depression of the 1930’s, we remained a single-office bank until we opened our second office in downtown Murphy, North Carolina in 1981. Between 1993 and 2002, we added eight more branches in North Carolina, including a second office in Franklin, one in each of Highlands, Brevard, Sylva, Cashiers and Arden, and two in Hendersonville. In 2007, we opened two more branches in Columbus and Saluda, North Carolina.

Today, in addition to our corporate headquarters, we have 11 branches located throughout the Western North Carolina counties of Cherokee, Henderson, Jackson, Macon, Polk and Transylvania, which we consider our primary market area. Our business consists primarily of accepting deposits from individuals and small businesses and investing those deposits, together with funds generated from operations and borrowings, primarily in loans secured by real estate, including commercial real estate loans, one- to four-family residential loans, construction loans, home equity loans and lines of credit. We also originate commercial business loans and invest in investment securities. Through our mortgage loan production operations, we originate loans for sale in the secondary markets to Fannie Mae and others, generally retaining the servicing rights in order to generate cash flow, supplement our core deposits with escrow deposits and maintain relationships with local borrowers. We offer a variety of deposit accounts, including savings accounts, certificates of deposit, money market accounts, commercial and regular checking accounts, and individual retirement accounts.

In addition to making loans within our primary market area, we also regularly extend loans to customers located in neighboring counties, including Buncombe, Clay, Haywood and Rutherford in North Carolina;Fannin, Rabun, Towns and Union in Georgia; and Cherokee, Greenville, Oconee, Pickens and Spartanburg in South Carolina, which we consider our secondary market area.

The primary economic drivers of our primary market area are tourism and a burgeoning vacation and retirement industry, which has provided a significant stimulus to residential and resort development. Although thishome industry. This area has relatively few large manufacturing facilities, it has numerous small- to mid-sized businesses, which are our primary business customers. These businesses include agricultural producers, artisans and specialty craft manufacturers, small industrial manufacturers, and a variety of service oriented industries. The largest employers in Macon County include Drake Software, a national tax software provider, based in Franklin.

A new casino and hotel complex is currently under construction in Cherokee County. The table below provides 2000casino and 2010 populationhotel, which will be operated by Caesars Entertainment Corp., are projected to employ create additional employment directly and household data for eachthrough increased economic activity in the area.

We have recently observed an improvement in the economic condition of the counties within our primary market area. During this period, Henderson County experienced significant growth, making it one of the leading counties in North Carolina, in terms of population growth. Every county within our primary market area, except Henderson County, has a relatively low cost of living and, consequently, lower than state and national average per capita personal income levels. Our primary market area, which relies heavily on tourism and has a significant amount of holiday homes owned by out-of-state residents, has suffered during the current economic recession. Recently, there have been some signs thatAs reflected in the economicfollowing tables, our market is experiencing a significant decline may be near the bottomin levels of unemployment, and starting to improve. As of March 31, 2011, unemployment ratesa rise in our primary market area were as follows: Macon (11.9%), Jackson (9.3%), Polk (7.8%), Cherokee (13.0%), Henderson (7.9%), and Transylvania (9.1%). By contrast, as of March 31, 2011, North Carolina’s reported unemployment rate was 9.7% and the national unemployment rate was 9.2%.

Population and Personal Income Datahousehold income.

 

   County       
   Macon  Jackson  Polk  Cherokee  Henderson  Transylvania  North Carolina  United States 

Population 2000

   29,811    33,121    18,324    24,298    89,173    29,334    8,049,313    281,421,906  

Population 2010

   34,465    38,012    19,435    27,557    106,932    31,327    9,552,054    311,212,863  
                                 

Population increase

   4,654    4,891    1,111    3,259    17,759    1,993    1,502,741    29,790,957  

% increase

   15.6  14.8  6.1  13.4  19.9  6.8  18.7  10.6

Per Capital Personal Income 2000

  $18,642   $17,582   $19,804   $15,814   $21,110   $20,767   $20,307   $21,587  

Per Capital Personal Income 2010

   21,684    21,988    24,552    18,979    25,455    25,015    25,349    26,739  
                                 

Income increase 2000-2010

  $3,042   $4,406   $4,748   $3,165   $4,345   $4,248   $5,042   $5,152  

% increase

   16.3  25.1  24.0  20.0  20.6  20.5  24.8  23.9
   Unemployment Rate 
  12/31/2013   12/31/2012   12/31/2011   12/31/2010   12/31/2009 
   (%)   (%)   (%)   (%)   (%) 

Cherokee, NC

   9.00     12.80     12.90     12.60     15.50  

Henderson, NC

   4.90     7.20     7.60     7.50     8.80  

Jackson, NC

   5.80     9.60     9.40     8.80     9.40  

Macon, NC

   7.30     11.10     11.30     10.30     11.40  

Polk, NC

   4.60     7.80     7.70     7.50     8.90  

Transylvania, NC

   6.60     10.10     9.60     9.00     10.00  

North Carolina

   6.60     9.50     9.80     9.70     10.90  

United States

   6.70     7.80     8.50     9.30     9.90  

Source:Carson Medlin and SNL Financial

   Median Household Income 
  2013   2012   2011 
   ($)   ($)   ($) 

Cherokee, NC

   37,906     35,188     31,495  

Henderson, NC

   47,465     42,990     39,997  

Jackson, NC

   37,922     36,366     37,593  

Macon, NC

   38,969     36,738     36,173  

Polk, NC

   39,573     42,520     42,005  

Transylvania, NC

   38,758     37,735     38,822  

North Carolina

   44,373     42,900     42,941  

United States

   51,314     50,157     50,227  

Source: SNL

Market Share.We encounterhave significant competition in our primary and secondary market areas. We compete with commercial banks, savings institutions, finance companies, credit unions and other financial services companies. Many of our larger commercial bank competitors have greater name recognition and offer certain services that we do not. However, we believe that our long-time presence in our primary market area and focus on superior service distinguish us from our competitors, many of whom operate under different names or are instrumental to our successunder different leadership as a consequence of the effects of the recent recession and leading deposit market share. a series of acquisitions and mergers.

Between 2000 and 2010,2013, we increased our share of the combined deposits of all banks and thrifts operating in our primary market area from 9.4% in 2000 to 17.4%15.2% in 2010,2013, and now lead all but one of our competitors in total deposits within our primary market area. The following tables show our deposit market share within the Bank’s primary market area, as shown below.

Competing Banks and Thriftsof June 30, 2013, the most recent publicly reported figures.

 

Total

Deposit

Rank

2010

  

Institution

  Institution City  Institution
Headquarters
State
  Total
Active
Branches
2000
   Total
Active
Branches
2010
   Total  deposits
(1)

2000
(thousands)
   Total
Deposit
Market
Share
2000
(%)
 Total  deposits
(1)

2010
(thousands)
   Total
Deposit
Market
Share
2010
(%)
 

Total
Deposit
Rank
2013

        Institution
Headquarters
State/
Country
  Total
Active
Branches
2000
   Total
Active
Branches
2013
   Total
deposits(1)
2000
   Total
Deposit
Market
Share
2000
 Total
deposits(1)
2013
   Total
Deposit
Market
Share
2013
 
                   (thousands)     (thousands)     
  Institution  Institution City                         
1  Macon Bank  Franklin  NC   9     11     250,605     9.4  820,204     17.4  

First-Citizens Bank & Trust Company (2)

  Raleigh  NC   20     15    $462,981     17.4 $830,036     18.6
2  

First-Citizens Bank &

Trust Co.

  Raleigh  NC   22     17     490,284     18.4  736,358     15.6  

Macon Bank

  Franklin  NC   9     11     250,605     9.4    678,050     15.2  
3  Wells Fargo Bank NA  Sioux Falls  SD   14     9     461,851     17.3  489,042     10.4  

Wells Fargo Bank, N.A.

  Sioux Falls  SD   8     8     379,125     14.2   511,674     11.5  
4  United Community Bank  Blairsville  GA   10     11     296,203     11.1  465,146     9.9  

United Community Bank

  Blairsville  GA   —       10     —       —     455,884     10.2  
5  

Mountain 1st Bank &

Trust Co.

  Hendersonville  NC   0     6     —       0.0  435,959     9.2  

Mountain 1st Bank & Trust Company(2)

  Hendersonville  NC   —       6     —       —     413,762     9.3  
6  TD Bank NA  Wilmington  DE   4     8     157,604     5.9  344,581     7.3  

PNC Bank, N.A.

  Pittsburgh  PA   5     7     205,193     7.7   300,411     6.7  
7  Home Trust Bank  Clyde  NC   4     3     211,025     7.9  321,634     6.8  

HomeTrust Bank

  Clyde  NC   —       3     —       —     267,130     6.0  
8  RBC Bank (USA)  Raleigh  NC   10     7     313,509     11.8  245,719     5.2  

TD Bank, N.A.

  Toronto  Canada   —       7     —       —     242,270     5.4  
9  Bank of America NA  Charlotte  NC   4     4     144,960     5.4  154,829     3.3  

Branch Banking and Trust Company

  Winston-Salem  NC   1     5     27,843     1.0   158,850     3.6  
10  SunTrust Bank  Atlanta  GA   5     4     176,660     6.6  149,169     3.2  

Bank of America, N.A.

  Charlotte  NC   4     4     144,960     5.4   151,300     3.4  

 

(1)Total deposits represent the six counties in which Macon Bank has branches.
(2)On January 1, 2014 Mountain 1st Bank & Trust Company merged with and into First-Citizens Bank & Trust Company.

Source:Source - FDIC

The following table shows our deposit market share in each county within our primary market area, as of June 30, 2013, the most recent publicly reported figures.

Deposit Market Share by County 
As of June 30, 2013 

County

  Deposit Market
Share Rank
  Market
Share
 

Cherokee County

  4   11.7

Henderson County (1)

  6   5.3  

Jackson County

  3   19.4  

Macon County

  1   38.0  

Polk County

  2   17.5  

Transylvania County

  4   12.8  

(1)After giving effect to the merger of Mountain 1st Bank & Trust Company with and into First-Citizens Bank & Trust Company.

Source - FDIC

In addition to successfully building our branch network and growing our core deposits, we have sought to createcreated an infrastructure that will accommodate future growth. One of our core strengths has been our successful mortgage loan operation, through which we originate and sell mortgage loans in the secondary markets to Fannie Mae and others. In 1999, we opened a call center to better and more efficiently serve our customers. In 2001, we consolidated our corporate headquarters, loan processing and training facilities into a single 36,000 square foot building in Franklin, North Carolina.Franklin.

We have sought to improvefocus upon continual improvement of our level of service and overall efficiencies through the use of technology, offering online banking for retail customers, which we market asMacon eCom; online banking for businesses, which we market asMacon eCorp; mobile banking; remote deposit capture; and remotemobile deposit capture. We also provide investment services through ouran affiliation with Morgan Stanley/Smith Barney,an independent broker/dealer firm, merchant credit card services for business customers, and ATM services.

Recently, in anticipation of our mutual-to-stock conversion, we added two experienced bankers to supplement our executive management team, W. David Sweatt, Executive Chairman of the Bank, and Gary L. Brown, our First Vice President and Chief Credit Officer. We hired Mr. Sweatt and Mr. Brown because of their experience with commercial lending, resolving problem assets, working with regulatory agreements, and running public companies. Mr. Sweatt has 30 years of banking experience, having held a number of senior executive and operational positions, including chairman, president and chief executive officer, within a variety of financial institutions throughout the Southeast. Mr. Brown has 34 years of banking experience, including president and chief executive officer of a community bank, and most recently, post closing asset manager in the Division of Resolutions and Receiverships of the FDIC, Jacksonville, Florida.

We remainare committed to supporting our local communities and offering personal, one-on-one service to our customers. Our employees, officers and directors personally know many of our customers, live within the communities we serve, and play key roles in community organizations. In addition, we sponsor numerous local community events and strive to be a good corporate citizen in all of the communities that we serve. We believe we have a loyal base of employees. Our employees have an average of over nine yearsyears’ service with the Bank. More than one in sixfour of our employees have served the Bank for over 2015 years. We believe that the longevity ofthis employee-service commitment is critical to maintaining personal relationships with our customers. Such longevity of service is exemplified by our President and Chief Executive Officer, Roger D. Plemens, who has served the Bank since 1978, in various capacities, including as a mortgage officer, a manager of mortgage lending, and the chief lending officer. Our guiding principle is simple. We are committed to maintaining our culture of community banking and focused upon bringing value to our customers through innovations, technology, products and services of the 21st century.

Lending Activities

Our primary lending activities are the origination of one- to four-family residential mortgage loans, commercial real estate loans, commercial business loans and home equity loans and lines of credit. Our largest category of loans is one- to four-family residential mortgage loans followed by commercial real estate, and other construction and land loans. At MarchDecember 31, 2011,2013, our top 25 relationships represented a lending exposure of $132.6$92.1 million with the largest single relationship totaling $14.3$9.8 million. These loans are primarily for commercial business purposes and collateralized by real estate, primarily commercial, and construction and land development loans.

One- to Four-Family Residential Mortgage Loans.At MarchDecember 31, 2011, $241.22013, $225.5 million, or 34.9%43.1%, of our total loan portfolio consisted of one- to four-family residential mortgage loans. We offer fixed-rate and adjustable-rate residential mortgage loans with maturities generally up to 30 years. We generally sell 15- and 30-year fixed loans in the secondary market.

Our one- to four-family residential mortgage loans originated for sale are underwritten according to Fannie Mae underwriting guidelines. When these loans are sold into the secondary market, we generally retain the servicing rights. We refer to loans that conform to such guidelines as “conforming loans.” We originate both fixed- and adjustable-rate mortgage loans in amounts up to the maximum conforming loan limits as established by the Office of Federal Housing Enterprise Oversight, which is generally $417,000 for single-family homes. Loans in excess of $417,000 (referred to as “jumbo loans”) may be originated for retention in our loan portfolio. Our maximum loan amount for these loans is generally $1,500,000. We generally underwrite jumbo loans in the same manner as conforming loans.

We will originate loans with loan-to-value ratios in excess of 80% for sale into the secondary market. We require private mortgage insurance for loans with loan-to-value ratios in excess of 80%. Subject to satisfactory underwriting, we will occasionally make loans with a loan-to-value ratio as high as 90%89% for retention in our loan portfolio, in which case we may not require private mortgage insurance.

We generally retain the servicing rights on loans sold in the secondary market in order to generate cash flow, supplement our core deposits with escrow deposits, and maintain relationships with local borrowers.

We offer special programs for first-time home purchasers and low- and moderate-income home purchasers. The property must be located in a low-moderate census tract within our lending area. Household income may not exceed 100% of median income of the metropolitan statistical area.

Other than our loans for the construction of one- to four-family residential mortgage loans (described under “—“– One-to Four-Family Residential Construction, Other Construction and Land, and Consumer Loans”) and home equity loans and lines of credit (described under “—“– Home Equity Loans and Lines of Credit”), presently we do not offer “interest only” mortgage loans (where the borrower pays only interest for an initial period, after which the loan converts to a fully amortizing loan) on one- to four-family residential properties.

We do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower may pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan. We originated a small number “no documentation” and “Alt-A” loans between 2003 and 2005. To date, we have only repurchased one no-documentation loan, at a cost to the Bank of $50,000; and one construction-permanent loan, which currently is performing. As of March 31, 2011, we have been notified of one loan repurchase, for which we have an expected loss of $192,000 in the second quarter of 2011.

Commercial Real Estate Loans.At MarchDecember 31, 2011, $202.12013, $155.6 million, or 29.3%29.7%, of our loan portfolio, consisted of commercial real estate loans. Properties securing our commercial real estate loans primarily comprise business owner-occupied properties, small office buildings and office suites, and income-producing

real estate. Substantially all of our commercial real estate loans are secured by properties located in our market areas. At MarchDecember 31, 2011,2013, our largest commercial single real estate loan had a principal balance of $10.6$4.5 million and was secured by a first mortgage on multi-use commercial and multi-family residential real estate.a multi-tenant shopping center. This loan was performing in accordance with its terms at MarchDecember 31, 2011.2013.

In the underwriting of commercial real estate loans, we generally lend up to the lesser of 80% of the property’s appraised value or purchase price.price of the property. We base our decision to lend primarily on the economic viability of the property and the creditworthiness of the borrower. In evaluating a proposed commercial real estate loan, we emphasize the ratio of the property’s projected net cash flow to the loan’s debt service requirement (generally requiring a preferred ratio of 1.25x), computed after deduction for an appropriate vacancy factor and reasonable expenses. Personal guarantees are usually obtained from commercialIndividuals owning 20% or more of the business and/or real estate borrowers.are generally required to sign the note as co-borrowers under the note or to provide personal guarantees. We require title insurance, fire and extended coverage casualty insurance, and, if appropriate, flood insurance, in order to protect our security interest in the underlying property. Almost all of our commercial real estate loans are generated internally by our loan officers.

Commercial real estate loans generally carry higher interest rates and have shorter terms than one- to four-family residential mortgage loans. Commercial real estate loans, however, entailgenerally, have greater credit risks compared to the one- to four-family residential mortgage loans we originate, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment of loans secured by income-producing properties typically depends on the successful operation of the property, as repayment of the loan generally is dependent, in large part, on sufficient income from the property to cover operating expenses and debt service. Changes in economic conditions not within the control of the borrower or lender could affect the value of the underlying collateral for the loan or the future cashflowcash flow of the property. Additionally, any decline in real estate values may be more pronounced for commercial real estate than residential properties.

Home Equity Loans and Lines of Credit.At MarchDecember 31, 2011, $73.62013, $56.8 million or 10.7%10.9% of our loan portfolio consisted of home equity loans and lines of credit. In addition to traditional one- to four-family residential mortgage loans, we offer home equity loans and lines of credit that are secured by the borrower’s primary or secondary residence. Our home equity loans and lines of credit are currently originated with fixed or adjustable rates of interest. Home equity loans and lines of credit are generally underwritten with the same criteria that we use to underwrite one- to four-family residential mortgage loans. For a borrower’s primary residence, home equity loans and lines of credit may be underwritten with a loan-to-value ratio of 80% when combined with the principal balance of the existing mortgage loan, while the maximum loan-to-value ratio on secondary residences is 70% when combined with the principal balance of the existing mortgage loan. We require appraisals or internally prepared real estate evaluations on home equity loans and lines of credit. At the time we close a home equity loan or line of credit, we record a deed of trust to perfect our security interest in the underlying collateral. At March 31, 2011, our in-house maximum limit for a home equity line of credit was $250,000.

Home equity loans and lines of credit entail greater credit risks compared to one- to four-family residential mortgage loans. Between 2005 and 2008,At December 31, 2013, we offeredhad total home equity loans andline commitments of $101.2 million with $56.8 million, or 56.2%, advanced. First lien home equity lines balances accounted for 37.8% of credit at loan-to-value ratiosthe total amount advanced. At December 31, 2013, $0.7 million of up to 100%. In 2009 and 2010, we experienced net losses in our home equity loans and lines of credit portfolio of $2.5 million and $3.2 million, respectively. Declines in real estate values experienced in the current economic downturn contributed to these losses. At March 31, 2011, we had $2.5 million in home equity loans and lines of creditwere past due greater than 30 days or in non-accrual status.more.

Commercial Business Loans.At MarchDecember 31, 2011, $15.12013, $8.3 million, or 2.2%1.6%, of our loan portfolio consisted of commercial business loans. We make various types of secured and unsecured commercial business loans to customers in our market area for the purpose ofareas in order to provide customers with working capital and for other general business purposes. The terms of these loans generally range from less than one year to a maximum of 10 years. These loans bear either a fixed interest rate or an interest rate linked to a variable market index. We seek to originate loans to small- and medium-sizeto medium-sized businesses with principal balances between $150,000 and $750,000.$750,000; however, we also originate government-guaranteed Small Business Administration, or SBA, loans with higher balances with the intent of selling the guaranteed portion into the secondary market. SBA lending to date has been immaterial.

Commercial credit decisions are based upon our credit assessment of each applicant. We evaluate the applicant’s ability to repay in accordance with the proposed terms of the loan and we assess the risks involved. Personal guaranteesIndividuals owning 20% or more of the principalsbusiness and/or real estate are typically obtained.generally required to sign the note as co-borrowers or provide personal guarantees. In addition to evaluating the applicant’s financial statements, we consider the adequacy of the primary and secondary sources of repayment for the loan. Credit agency reports of the applicant’s personal credit history supplement our analysis of the applicant’s creditworthiness. CollateralIn addition, collateral supporting a secured transaction also is analyzed to determine its marketability. Commercial business loans generally have higher interest rates than residential loans of likesimilar duration because they have a higher risk of default since theirwith repayment generally dependsdepending on the successful operation of the borrower’s business and the sufficiency of any collateral.

At MarchDecember 31, 2011,2013, our largest commercial non real estate business loan had a principal balance of $2.2$6.0 million and was secured by a first mortgage on single family residential real estate, as well as additional residential building lots, balance of $0.8 million and was secured primarily by a first ranking deedbusiness inventory. At December 31, 2013, both of trust. At March 31, 2011, this loan wasthese loans were performing in accordance with itstheir respective terms. Also at this date, we had no other commercial business loans with balances in excess of $1.0 million.

One- to Four-Family Residential Construction, Loans,Other Construction and Land, Loans and OtherConsumer Loans.At MarchDecember 31, 2011,2013, our portfolio included $15.2$9.0 million of one- to four-family residential construction loans or 2.2% of our loan portfolio. Land loans and other construction loans comprised $139.6 million or 20.2%1.7% of our loan portfolio. Other construction and land loans comprised $64.9 million, or 12.4% of our loan portfolio. Consumer loans totaled $3.9$3.7 million, or 0.6%0.7% of our loan portfolio, and included automobile and other consumer loans. We make construction loans to owner-occupiers of residential properties, and to businesses for commercial properties. In the past, we made loans to developers for speculative residential construction. However,construction; however, following the present economic downturn and over-supply of existing construction in our market areas hasrecession we virtually eliminated viable speculative construction lending. At MarchDecember 31, 2011, $6.92013, $2.6 million, or%, 0.5% of our loan portfolio consisted of loans to developers for speculative residential construction. Advances on construction loans are made in accordance with a schedule reflecting the cost of construction, but are generally limited to an 80% loan-to-value ratio based on the appraised value upon completion. Repayment of construction loans on non-residential properties is normally expected from theattributable to rental income, income from the borrower’s operating entity or upon the sale of the property. Repayment of loans on income-producing property is expected uponnormally scheduled following completion of construction, when permanent financing is obtained. We typically provide permanent mortgage financing on our construction loans for income-producing property. Construction loans are “interest-only” loansinterest-only during the construction period, which typically does not exceed 12 months, and convertsconvert to permanent, amortizingfully-amortizing financing following the completion of construction.

Generally, before making a commitment to fund a construction loan, we require an appraisal of the property by a state-certified or state-licensed appraiser. We review and inspect properties before disbursement of funds during the term of the construction loan.

Construction financing generally involves greater credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loanloans depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate ofestimated construction cost is inaccurate, we may be required to advance additional funds beyond the amount originally committed may be advanced in order to completeensure the completion of the construction and protect the value of our investment in the property. Construction loans also expose us to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as originally anticipated.

Loan Originations, Purchases, Sales, Participations and Servicing.All residential loans that we originate are underwritten pursuant to our policies and procedures, which incorporate standard Fannie Mae underwriting guidelines, to the extentas applicable. We originate both adjustable-rate and fixed-rate loans. Our loan origination and sales activity may be adversely affected by a rising interest rate environment that typically results in decreased loan demand. Most of our one- to four-family residential mortgage loan originationsloans are generatedoriginated by our loan officers.

Historically, we have sold most of our 15 years15-year and longer residential loans to Fannie Mae or non-government purchasers, with loan servicing rights retained.purchasers. During the 12 months ended December 31, 2010,2013, 2012, and 2009,2011, we sold $36.3$63.1 million, $41.1 million, and $99.5$19.7 million, respectively, of conforming residential loans, primarily with terms of 15 years and longer. During the three months ended March 31, 2011, we sold $6.3 million of loans, primarily with terms of 15 years and longer.

We sell our loans with the servicing rights retained on residential mortgage loans, and we have no immediate plans to change this practice.

At MarchDecember 31, 2011,2013, we were servicing residential loans owned by others with a principal balance of $301.6$241.2 million. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent borrowers, supervising foreclosures, and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans. We retain a portion of the interest paid by the borrower on the loans we service as consideration for ourperforming these servicing activities.

At December 31, 2013, we were servicing commercial loan participations having a gross loan amount of $29.8 million, of which $15.5 million was retained by us and $14.3 million was owned by our co-participants. From time to time, we have participated in loans originated by other financial institutions that service and remit payments to us. At MarchDecember 31, 2011,2013, the unpaid balance of these loans was $16.7$3.3 million.

Loan Approval Procedures and Authority. Our lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by the Bank Board. The loan approval process is intended to assess the borrower’s ability to repay the loan and value of the collateral that will secure the loan. To assess the borrower’s ability to repay, we review the borrower’s employment and credit history and information on the historical and projected income and expenses of the borrower.

Our policies and loan approval limits are established by the Bank Board. Loans in amounts up to individual loan authority limits set annually by management and the Bank Board can be approved by designated individual officers or officers acting together pursuant to our loan policy. Relationships in excess of these amounts require the approval of the Officers Loan Committee, Executive Loan Committee, or Directors Loan Committee within the authority limits ofset by the Bank Board. The Bank Board may approve loans up to the internal loans-to-one-borrower policy limit of $12.5$7.5 million, which is below the Bank’s regulatory loans-to-one-borrower limit. We have one loan relationship which exceeds this limit which includes three loans totaling $14.3 million. These three loans were made prior to the Bank establishing this internal limit.of $10.4 million as of December 31, 2013.

We require appraisals or internally prepared evaluations of all real property securing one- to four-family residential and commercial real estate loans and home equity loans and lines of credit. All appraisers are state-licensed or state-certified, appraisers, and our practice is to have local appraisers approved on an annual basis by the Bank Board. Internal evaluations are prepared only by individuals possessing the necessary skill and experience to meet regulatory competency requirements. Evaluations are reviewed by staff who report directly to Chief Risk Officer to ensure independence from the loan production process.

Investments

The Bank’s ALCO Committee consists of our President and Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Treasurer, Controller, Chief Credit Officer, Director of Commercial Lending, Chief OperationsAdministration Officer, Chief Retail Officer, Director of Mortgage/Consumer Lending,Financial Reporting, and such other members as are from time to time designated. The ALCO Committee is primarily responsible, subject to the ultimate approval of the Bank’s Board, for implementing our investment policy. The general investment strategies are developed and authorized by the ALCO Committee in consultation with the Board of the Bank.Bank Board. The ALCO Committee is responsible for the execution of specific investment actions by our Chief Operating Officer, Chief Financial Officer Treasurer or President and Chief Executive Officer, for all sales, purchases, or trades executed in the investment portfolio. The Chief FinancialOperating Officer, and TreasurerChief Financial Officer may approve transactions of up to $10 million. The President and Chief FinancialOperating Officer may jointly approve transactions above $10 million within the scope of the investment policy.

All our investment transactions are periodically reported to the ALCO Committee and the Bank’sBank Board. The investment policy is reviewed annually by the ALCO Committee, and any changes to the policy are subject to approval by the full Board of the Bank.Bank Board. The overall objectives of our investment policy are to maintain a portfolio of high quality and diversified investments to maximize interest income over the long term and to minimize risk, to provide collateral for borrowings, to provide additional earnings when loan production is low, and, when appropriate, to reduce our tax liability. The policy dictates that investment decisions give consideration to the safety of principal, liquidity requirements and interest rate risk management.

Our current investment policy permits investments that meet certain quality guidelines in direct U.S. Government obligations and securities, U.S. Government agencies, municipal securities, mortgage-backed securities and collateralized mortgage obligations, corporate issues, certain commercial paper, agency structured notes, and bank owned life insurance. We do not presently hold securities in either “held-to-maturity” or “trading” categories.classified as “trading.” In accordance with ASC Topic 802-10-35-01 title, investment securities “available-for-sale” are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices of like or similar securities, if available, and these securities are classified as Level 1 or Level 2. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions and are classified as Level 3.

At MarchDecember 31, 2011, all of2013, our securities wereportfolio consisted of securities classified as “available-for-sale.”“available-for-sale” with a carrying value of $155.5, million and securities classified as “held-to-maturity” with a carrying value of $21.0 million. Our securities portfolio at MarchDecember 31, 2011,2013, consisted primarily of securities with the following carrying value: $35.2values: $25.6 million of municipal obligations, $14.5obligations; $3.5 million of U.S. Government and agency obligations, $12.0obligations; $39.4 million in structured U.S. Government agency obligations, $1.0 million of corporate bonds, $81.1obligations; $84.4 million of mortgage-backed securities issued by U.S. Government agencies; $3.6$18.1 million in Small Business Administration securities, $6.9SBA securities; $3.0 million of collateralized mortgage obligationsobligations; $1.9 million in commercial mortgage-backed securities issued by U.S. Government agencies; and $0.5$0.6 million in a Community Reinvestment Act investment fund. We also held $18.5$20.0 million in bank owned life insurance.

See “–“Management Discussion and Analysis of Consolidated Financial Conditions and Results of Operations – Investment Securities Portfolio”Securities” on pagefor a discussion of the recent performance of our securities portfolio.

We purchase mortgage-backed securities insured or guaranteed by Fannie Mae, Freddie Mac or the Government National Mortgage Association. We invest in quality securities to obtain yields higher than we can receive from holding in overnight cash or other short term cash accounts, and to meet our Asset/Liability objectives which focus on liquidity and interest rate risk in our portfolio as a whole.

Mortgage-backed securities are securities issued in the secondary market that are collateralized by pools of mortgages. Certain types of mortgage-backed securities are commonly referred to as “pass-through” certificates because the principal and interest of the underlying loans is “passed through” to investors, net of certain costs, including servicing and guarantee fees. Mortgage-backed securities typically are collateralized by pools of one- to four-family or multifamily mortgages, although we invest primarily in mortgage-backed securities backed by one- to four-family mortgages. The issuers of such securities pool and resell the participation interests in the form of securities to investors. The interest rate on the security is lower than the interest rates on the underlying loans to allow for payment of servicing and guaranty fees. Government National Mortgage Association, a U.S. Government agency, and government sponsored enterprises, such as Fannie Mae and Freddie Mac, either guarantee the payments or guarantee the timely payment of principal and interest to investors. Mortgage-backed securities are more liquid than individual mortgage loans since there is an active trading market for these securities. In addition, mortgage-backed securities may be used to collateralize our borrowings. Investments in mortgage-backed securities involve a risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such interests, thereby affecting the net yield on our securities. Current prepayment speeds determine whether prepayment estimates require modification that could cause amortization or accretion adjustments.

Many of our securities have call provisions that allow for issuers of the securities, or the underlying borrowers to either redeem or prepay the obligations. This call/prepayment risk can effectively shorten the life of our portfolio should rates decline, and represents a risk of a decline in the overall yield of our portfolio should such an instance occur.

Sources of Funds

General.Deposits traditionally have been our primary source of funds for our investment and lending activities. Our primary outside borrowing source is the FHLB of Atlanta. We have in the past used both brokered deposits and internet generated deposits to fund loan growth. Ourgrowth and to manage interest rate risk. As required by the Consent Order, our current practice is to repay brokered deposits as they mature, and not seek to roll

them over for additional terms. Our additional sources of funds are scheduled loan payments, maturing investments, loan repayments, security repurchase agreements, retained earnings, income on other earning assets and the proceeds of loan sales.

Deposits.We accept deposits primarily from within our primary market area. As noted, we have also used brokered and internet deposits as a source of funds. We rely on our competitive pricing and products, convenient locations and quality customer service to attract and retain deposits. Our branch network is well established in our primary market area. We offer a variety of deposit accounts with a range of interest rates and terms. Our deposit accounts consist of savings accounts, certificates of deposit, regular checking accounts, money market accounts and individual retirement accounts.

Interest rates paid, maturity terms, service fees and withdrawal penalties are revised on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market interest rates, liquidity requirements and our deposit growth goals.

Borrowings.Our borrowings consist of advances from the FHLB of Atlanta. At MarchDecember 31, 2011,2013, FHLB advances totaled $65.9$40.0 million, or 7.5%5.3%, of total liabilities. At MarchDecember 31, 2011,2013, we had access to additional FHLB advances of up to $96.8 million.$53.4 million using collateral that is currently pledged. Advances from the FHLB of Atlanta are secured by our investment in the common stock of the FHLB of Atlanta, securities in our investment portfolio, and approved loans in our one- to four-family residential and commercial loan portfolios. We have the capacity to pledgeAt December 31, 2013, we had $148.1 million of qualifying unpledged securities which could be pledged as collateral for additional securities to the FHLBadvances. See “Management Discussion and Analysis of Atlanta should our borrowing needs increase. See “–Consolidated Financial Conditions and Results of Operations – Liquidity and Capital Resources” on page.

Properties

We operate from our corporate headquarters and 11 branches located in our primary market area within Westernwestern North Carolina. The net book value of our premises, land and equipment was $14.2$13.0 million at MarchDecember 31, 2011.2013. The following table sets forth information with respect to our full-service banking offices.

Branch Location Information

March 31, 2011

(Dollars in thousands)

Branch Name

  

Address

  

City

  Year
Established
   Deposits at
March 31, 2011
   

Address

  

City

  Year
Established
  Deposits at
December 31,
2013
 

Franklin Main

  50 West Main Street  Franklin   1922    $186,588    50 West Main Street  Franklin  1922  $179,228  

Murphy

  12 Peachtree Street  Murphy   1981     48,801    12 Peachtree Street  Murphy  1981   53,301  

Franklin Holly Springs Plaza

  30 Hyatt Road  Franklin   1993     50,696    30 Hyatt Road  Franklin  1993   54,678  

Highlands

  473 Carolina Way  Highlands   1995     43,034    473 Carolina Way  Highlands  1995   45,521  

Sylva

  498 East Main Street  Sylva   1999     40,933    498 East Main Street  Sylva  1999   38,111  

Hendersonville - Laurel Park

  640 North Main Street  Hendersonville   1996     57,733    640 North Main Street  Hendersonville  1996   63,081  

Brevard Branch

  2260 Asheville Highway  Brevard   1997     59,364    2260 Asheville Highway  Brevard  1997   59,529  

Hendersonville- Eastside(1)

  1617 Spartanburg Highway  Hendersonville   1997     30,606  

Hendersonville - Eastside(1)

  1617 Spartanburg Highway  Hendersonville  1997   29,784  

Cashiers Branch

  500 U.S. Highway 64  Cashiers   2002     39,727    500 U.S. Highway 64  Cashiers  2002   37,811  

Columbus Branch

  160 W. Mill Street  Columbus   2007     36,762    160 W. Mill Street  Columbus  2007   42,745  

Saluda(1)

  108 East Main Street  Saluda   2007     18,947    108 East Main Street  Saluda  2007   23,658  

Internet and brokered deposits

         168,944           56,779  
        

 

 

Total Deposits

        $782,135          $684,226  
        

 

 

 

(1)

Leased offices.

Legal Proceedings

At MarchDecember 31, 2011,2013, we were not involved in any legal proceedings the outcome of which we believe would be material to our financial condition or results of operations.

Tax Allocation

Bancorp and the Bank are parties to a tax allocation agreement which establishes a method for allocating and reimbursing the payment of Bancorp’s consolidated tax liability.

Personnel

As of MarchDecember 31, 2011,2013, the Bank had 175185 full-time equivalent employees, including 169 full-time employees. Our employees are not represented by any collective bargaining group. Management believes that we have a good working relationship with our employees.

Subsidiaries

In addition to the Bank, Bancorp has one non-bank subsidiary, Macon Capital Trust I, a Delaware statutory trust, formed in 2003 to facilitate the issuance of trust preferred securities. Macon Capital Trust I is not consolidated in Bancorp’s financial statements. The Bank has one inactiveactive subsidiary, Macon Services, Inc. Macon Services, Inc. holds one property, classified as “real estate held for investment.” Macon Services, Inc., is consolidated in Bancorp’s financial statements.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF CONSOLIDATED

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This offering is being made by Entegra, a North Carolina corporation. Upon completion of this offering and the mutual-to-stock conversion, Bancorp, the mutual holding company parent of the Bank, will be merged into Entegra, with Entegra as the surviving entity, whereby the Bank will become a wholly-owned subsidiary of Entegra. Accordingly, this section references the consolidated financial condition and results of operations of Macon Bancorp and Macon Bank.

This section is intended to help potential investors understand our financial performance through a discussion of the factors affecting our consolidated financial condition at December 31, 2013 and 2012, and our consolidated results of operations for the years ended December 31, 2013, and 2012. This section should be read in conjunction with the Consolidated Financial Statements and Notes to the Consolidated Financial Statements that appear elsewhere in this prospectus.

Overview

Our results of operations depend primarily on our net interest income, which is the difference between the interest income we earn on our loan and investment portfolios and the interest expense we incur on our deposits and borrowings. Results of operations are also affected by service charges and other fees, provisions for loan losses, gains on sales of loans originated for sale and other income. Our noninterest expense consists primarily of salaries and employee benefits, net occupancy and equipment expense, data processing, professional and service fees, FDIC deposit insurance and REO expense.

Our results of operations are also significantly affected by general economic and competitive conditions in our market areas and nationally, as well as changes in interest rates, sources of funding, government policies and actions of regulatory authorities. Future changes in applicable laws, regulations or government policies may materially affect our financial condition and results of operations.

Our loan portfolio is primarily collateralized by residential and commercial real estate as detailed in the table below.

   2013  2012 
   $   %  $   % 
   (Dollars in thousands) 

Real estate loans:

       

One- to four-family residential

   225,520     43.1  227,726     40.5

Commercial

   155,633     29.7  173,529     30.8

Home equity loans and lines of credit

   56,836     10.9  62,090     11.0

One- to four-family residential construction

   8,952     1.7  10,309     1.8

Other construction and land

   64,927     12.4  76,788     13.6
  

 

 

   

 

 

  

 

 

   

 

 

 

Total real estate loans

   511,868     97.7  550,442     97.8
  

 

 

   

 

 

  

 

 

   

 

 

 

Commercial

   8,285     1.6  9,771     1.8

Consumer

   3,654     0.7  2,676     0.5
  

 

 

   

 

 

  

 

 

   

 

 

 

Total non-real estate loans

   11,939     2.3  12,447     2.2
  

 

 

   

 

 

  

 

 

   

 

 

 

Total loans

   523,807     100.0  562,889     100.0
  

 

 

   

 

 

  

 

 

   

 

 

 

At December 31, 2013, the fair value of our investment portfolio totaled $175.6 million, or 22.4%, of our total assets and represented the second largest component of our interest-earning assets. Our portfolio consists primarily of U.S. Government agency securities, U.S. Government agency sponsored mortgage-backed securities, collateralized mortgage obligations, and municipal securities. At December 31, 2013, $155.5 million of our securities were classified as “available-for-sale” and $20.1 million were classified as “held-to-maturity”. Our portfolio is a low risk portfolio and we have not had any “other than temporary impairment,” or OTTI.

At December 31, 2013, deposits totaled $684.2 million and were composed primarily of retail deposits from within our primary market area. We have reduced our brokered deposits to $11.5 million at December 31, 2013, or 1.7% of total deposits, from $78.6 million, or 10.5% of total deposits at December 31, 2011. We have consistently focused on building broader customer relationships and targeting small- to medium-sized business customers to increase our core deposits. We offer a variety of deposit accounts with a range of interest rates and terms. Our deposit accounts consist of savings accounts, certificates of deposit, money market accounts, commercial and regular checking accounts and individual retirement accounts. Interest rates, maturity terms, service fees and withdrawal penalties are reviewed on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market interest rates, liquidity requirements, and our deposit growth goals.

Anticipated Increase in Noninterest Expense

Following the completion of the offering, we anticipate that salary, professional fees, and miscellaneous noninterest expense will increase as a result of the increased costs associated with managing a public company. Also, following the offering, we intend to adopt one or more stock-based benefit plans that will provide for grants of stock options and restricted stock awards to our directors, officers and other employees. Any such stock-based benefit plans will be established no sooner than six months after the offering closes, and will require the approval of our shareholders.

Assuming that the adjusted maximum number of shares are sold in the offering (5,686,750 shares):

our stock-based benefit plans would grant stock options to purchase shares equal to 7% of the total shares issued in the offering, or 398,000 shares, to eligible participants, which would result in compensation expense over the vesting period of the options. Assuming a five-year vesting period and a Black-Scholes option pricing analysis of $3.33 per option, as described in “Pro Forma Data,” the annual expense associated with stock options granted under the stock-based benefit plans would be approximately $0.2 million; and

our stock-based benefit plans would award a number of shares equal to 3% of the total shares issued in the offering, or 171,000 shares, to eligible participants, which would be expensed as the awards vest. Assuming that all shares are awarded under the stock-based benefit plans at a price of $10.00 per share, and that the awards vest over a five-year period, the corresponding annual expense associated with shares awarded under the stock-based benefit plans would be approximately $0.2 million.

The actual expense of shares awarded under one or more stock-based benefit plans will be determined by the fair market value of the stock on the grant date, which might be greater than $10.00 per share. Further, the actual expense of stock options granted under one or more stock-based benefit plans will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used in the option pricing model ultimately used.

We may award shares of common stock and grant options in excess of 3% and 7%, respectively, of our total outstanding shares if the stock-based benefit plans are adopted more than one year following the completion of the conversion and the offering. This would further increase our expenses associated with stock-based benefit plans.

Critical Accounting Policies.

We consider accounting policies that require management to exercise significant judgment or discretion or make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income, to be critical accounting policies. Our significant accounting policies are discussed in detail in Note 2 of the Notes to Consolidated Financial Statements included in this prospectus.

The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we have elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards. As of December 31, 2013, there is not a significant difference in the presentation of our financial statements as compared to other public companies as a result of this transition guidance.

We consider the following to be our critical accounting policies.

Allowance for Loan Losses. We maintain an allowance for loan losses at an amount estimated to equal all credit losses inherent in our loan portfolio that are both probable and reasonable to estimate at a balance sheet date. Management’s determination of the adequacy of the allowance is based on evaluations, at least quarterly, of the loan portfolio and other relevant factors. However, this evaluation is inherently subjective, as it requires an estimate of the loss content for each risk rating and for each impaired loan, an estimate of the amounts and timing of expected future cash flows, and an estimate of the value of collateral. Based on our estimate of the level of allowance for loan losses required, we record a provision for loan losses to maintain the allowance for loan losses at an appropriate level.

All loan losses are charged to the allowance for loan losses and all recoveries are credited to it. Additions to the allowance for loan losses are provided by charges to income based on various factors which in our judgment deserve current recognition in estimating probable losses. When any loan or portion thereof is classified “doubtful” or “loss,” the loan will be charged down or charged off against the allowance for loan losses. Loans are deemed “doubtful” or “loss” based on a variety of credit, collateral, documentation and other issues. When collateral is foreclosed or repossessed, any principal charge-off related to that transaction, based upon the most current appraisal or evaluation, along with estimated sales expenses is taken at that time.

The determination of the allowance for loan losses is based on management’s current judgments about the loan portfolio credit quality and management’s consideration of all known relevant internal and external factors that affect loan collectability, as of the reporting date. We cannot predict with certainty the amount of loan charge-offs that will be incurred. We value non-homogeneous loans in our portfolio for specific impairment based primarily on appraised values less selling costs. We value homogeneous loans based on our historical loss experience within individual loan types. Qualitative and environmental factors are used to account for trends in economic conditions not captured in historical loss experience. In addition, our various regulatory agencies, as part of their examination processes, periodically review our allowance for loan losses. Such agencies may require that we recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination.

Troubled Debt Restructurings (“TDRs”). In accordance with accounting standards, we classify loans as TDRs when certain modifications are made to the loan terms and concessions are granted to borrowers whom we consider to have a defined financial difficulty. A defined financial difficulty includes a deficient global cash flow coverage ratio, a significant decline in a credit score, defaults with other creditors and other increases in the borrower’s risk profile that signify the borrower is experiencing financial difficulty. Our practice is to only restructure loans for borrowers in financial difficulty that have designed a viable business plan to fully pay off all outstanding debt, interest and fees post-restructure either by generating additional income from the business or through liquidation of assets. Generally, these loans are restructured to provide the borrower additional time to execute its business plan. With respect to TDRs, we grant concessions by reducing the stated interest rate for a specific time period, providing an interest-only period, or extending the maturity date at a stated interest rate lower than the current market rate for new debt with similar risk.

From time to time, in the normal course of business, we modify the interest rate and/or the amortization period of performing loans upon the request of the borrower. This is often done for competitive reasons in order to retain the borrower’s business. Where the borrower does not have a defined financial difficulty, such modifications are not classified as TDRs. Also, when we receive a material credit enhancement, such as an additional guarantee, additional collateral or a principal curtailment, in exchange for a concession, we do not classify the modification as a TDR.

Impaired loans.A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. All TDRs are classified as impaired loans.

We monitor collateral values of collateral-dependent impaired loans and periodically update our determination of the fair value of the collateral. Appraisals and evaluations are performed for collateral-dependent impaired loans at least every 12 months. In determining the fair value of collateral, market values are discounted so as to take into account typical selling expenses and closing costs if foreclosure of the property is deemed likely. We generally discount current market values by 10% to reflect the typical selling expenses, inclusive of real estate commissions charged on the sale by brokers in our markets. The discount applied for legal fees varies depending on the nature and anticipated complexity of the foreclosure, with a higher discount applied when the foreclosure is expected to be complex.

Evaluations are used predominately for residential-use properties for which market data is readily available or where we have recently liquidated a comparable property in close proximity to the subject real estate. We also use a service comparable to an automated valuation model to support internal evaluations. This service provides subject property and comparable data by compiling public information such as assessed tax values. We generally rely on external appraisers to value more complex income-producing property and other construction and land loans which require discounted cash flow assessments based on more complex market data research than what is normally available to us.

We adjust collateral values if we receive market data or evidence from recent sales of similar properties indicating that the appraised value of the collateral exceeds the value we can reasonably expect to receive upon its sale. Adjustments to increase appraised values are not permitted.We use realtors and market data to estimate the potential deficiency when we suspect the fair value of the collateral is less than the outstanding principal balance on a loan and an updated appraisal has not yet been received.

Deferred Tax Assets.Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on our deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date. A valuation allowance is required to be recognized if it is more likely than not that a deferred tax asset will not be realized. The determination as to whether we will be able to realize a deferred tax asset is highly subjective and dependent upon judgment concerning our evaluation of both positive and negative evidence, our forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. Positive evidence includes the existence of taxes paid in available carryback years as well as the probability that taxable income will be generated in future periods, while negative evidence includes any cumulative losses in the current year and prior two years and general business and economic trends. We had net cumulative losses for the three years ended December 31, 2013. This extended period of losses, combined with our analysis of future earnings, resulted in us establishing a valuation allowance of $22.6 million against our deferred tax asset at December 31, 2013.

Real Estate Owned (REO).REO, consisting of properties obtained through foreclosure or through a deed in lieu of foreclosure in satisfaction of loans, is reported at the lower of cost or fair value, determined on the basis of current appraisals, comparable sales, and other estimates of value obtained principally from independent sources. The cost or fair value is then reduced by estimated selling costs. Management also considers other factors, including changes in absorption rates, length of time a property has been on the market and anticipated sales values, which may result in adjustments to the collateral value estimates. At the time of foreclosure or initial possession of collateral, any excess loan balance over the fair value of the REO is treated as a charge against the allowance for loan losses.

Subsequent declines in the fair value of REO below the new cost basis are recorded through valuation adjustments. Significant judgments and complex estimates are required in estimating the fair value of REO, and the period of time within which such estimates can be considered current is significantly shortened during periods of market volatility. In response to market conditions and other economic factors, management may utilize liquidation sales as part of its problem asset disposition strategy. As a result of the significant judgments required in estimating fair value and the variables involved in different methods of disposition, the net proceeds realized from sales transactions could differ significantly from appraisals, comparable sales, and other estimates used to determine the fair value of REO. Management reviews the value of REO each quarter and adjusts the values as appropriate. Appraisals are obtained no less frequently than annually. Any subsequent adjustments to the value, and gains or losses on sales are recorded as “loss” on REO. Revenue and expenses from REO operations are recorded as REO expense. Both are components of noninterest expense.

Balance Sheet Analysis: December 31, 2013 and December 31, 2012

Total assets increased $14.7 million, or 1.9%, to $784.6 million at December 31, 2013, from $769.9 million at December 31, 2012. The increase was primarily a result of the Bank borrowing an additional $15.0 million in FHLB advances and experiencing $9.1 million of deposit growth during 2013. This additional funding was largely invested in additional cash and cash equivalents which increased $9.0 million, or 35.3%, and additional investment securities which increased $45.4 million, or 34.6%, during 2013. Decreases in net loans, which declined $38.9 million, or 6.9%, and REO, which declined $9.2 million, or 46.8%, also contributed to the increase in cash and investable assets.

Total liabilities increased by $24.4 million, or 3.35%, to $752.0 million at December 31, 2013, from $727.6 million at December 31, 2012, driven largely by an increase in deposits and FHLB advances. Total deposits increased by $9.1 million due primarily to an increase of $10.5 million, or 17.7% in non-interest bearing deposits. Interest-bearing deposits, excluding brokered deposits, increased by $10.3 million, or 1.7%. Interest bearing brokered deposits, decreased by $11.7 million, or 50.4%. FHLB advances increased by 60.0% to $40.0 million at December 31, 2013 from $25.0 million at December 31, 2012. The $15.0 million increase in FHLB advances had a blended weighted interest rate of 0.62%, and terms of 18 months to three years. This longer-term, low-cost funding was secured in order to mitigate our interest rate risk in anticipation of rising rates in the future.

Total equity declined by $9.8 million, or 23.1%, to $32.5 million at December 31, 2013, from $42.3 million at December 31, 2012. This decrease was primarily the result of a decrease of $9.4 million in accumulated other comprehensive income due to an increase in net unrealized losses on securities available-for-sale and an increase in the deferred tax valuation allowance for unrealized losses on securities available for sale. A net loss of $0.4 million also contributed to the decline in total equity.

Cash and Cash Equivalents. Total cash and cash equivalents increased $9.0 million, or 35.3%, to $34.3 million at December 31, 2013, from $25.4 million at December 31, 2012. The majority of this increase was due to an increase in interest-earning deposits with the FRB and FHLB, which increased $8.0 million, or 46.7%, to $25.2 million at December 31, 2013 from $17.2 million at December 31, 2012. The increase in cash and cash equivalents during 2013 is, in part, the result of the our decision to increase our liquidity in order to improve our interest rate risk position in advance of an expected rising interest rate environment.

Loans. The following table presents our loan portfolio composition and the corresponding percentage of total loans as of the dates indicated. Other construction and land loans include residential acquisition and development loans, commercial undeveloped land and one- to four-family improved and unimproved lots. Commercial real estate includes non-residential owner occupied and non-owner occupied real estate, multi-family, and owner-occupied investment property. Commercial business loans include unsecured commercial loans and commercial loans secured by business assets.

  At December 31, 
  2013  2012  2011  2010  2009 
  Amount  Percent  Amount  Percent  Amount  Percent  Amount  Percent  Amount  Percent 
  (Dollars in thousands) 

Real estate loans:

          

One- to four-family residential

 $225,520    43.1 $227,726    40.5 $231,564    37.5 $254,160    35.4 $244,830    31.6

Commercial

  155,633    29.7  173,529    30.8  180,820    29.3  201,219    28.0  197,006    25.4

Home equity loans and lines of credit

  56,836    10.9  62,090    11.0  68,952    11.2  75,322    10.5  90,219    11.7

One- to four-family residential construction

  8,952    1.7  10,309    1.8  9,325    1.5  15,552    2.2  28,559    3.7

Other construction and land

  64,927    12.4  76,788    13.6  112,926    18.3  151,894    21.2  190,983    24.7

Commercial

  8,285    1.6  9,771    1.8  10,943    1.7  15,395    2.1  16,545    2.1

Consumer

  3,654    0.7  2,676    0.5  3,051    0.5  4,288    0.6  6,242    0.8
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total loans

  523,807    100.0  562,889    100.0  617,581    100.0  717,830    100.0  774,384    100.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Net deferred loan fees

  1,933     2,165     2,032     2,326     2,646   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

Total loans, net

 $521,874    $560,724    $615,549    $715,504    $771,738   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

Percentage of total assets

  66.5   72.8   70.4   70.0   71.6 

In mid-2007, as economic conditions began to deteriorate, management recognized the need to reduce the Bank’s concentration in higher risk loans, especially other construction and land development loans. The Bank subsequently reduced its concentration in other construction and land loans to 12.4% of total loans at December 31, 2013, from 24.7% of total loans at December 31, 2009. Reductions have been achieved through payoffs of maturing loans, fewer loan originations, and foreclosure of non-performing loans.

Net loans as a percentage of total assets declined from a high of 71.6% at December 31, 2009, to 66.5% at December 31, 2013. This decline has been due to a number of factors including: (i) management’s desire to decrease the loan portfolio due to capital limitations; (ii) weak market conditions and soft loan demand from qualified borrowers and; (iii) an increased rate of foreclosures and charge-offs. During 2013, net loans declined by $38.9 million, or 6.9%, to $521.9 million at December 31, 2013 from $560.7 million at December 31, 2012. Although some stabilization in collateral prices has been experienced in our primary market area, loan demand across all categories of lending remains below pre-2008 levels.

The following tables present loans by contractual maturity along with corresponding weighted average rates by category as of December 31, 2013.

  One-to four-family
residential real estate
  Commercial real estate  Home equity loans
and lines of credit
  One- to four-family
Residential
Construction
 
  Amount  Weighted
Average rate
  Amount  Weighted
Average rate
  Amount  Weighted
Average rate
  Amount  Weighted
Average rate
 
  (Dollars in thousands) 

Due During the Twelve Months Ending December 31,

        

2014

 $3,623    6.05 $ 19,853    5.42 $388    5.09 $625    4.55

2015

  4,270    5.55    13,503    5.18    337    6.18    587    4.00  

2016

  2,940    5.71    9,124    5.07    1,109    5.26    206    5.50  

2017 to 2018

  4,439    5.14    14,305    5.62    11,563    5.67    500    5.88  

2019 to 2023

  8,412    5.03    23,645    4.85    33,819    5.42    103    7.00  

2024 to 2028

  44,387    4.08    19,458    5.05    9,605    4.81    591    5.74  

2029 and beyond

  157,449    4.44    55,745    4.79    15    4.25    6,340    4.03  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 $ 225,520    4.48 $ 155,633    5.04 $ 56,836    5.37 $ 8,952    4.35
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

   Other construction and land  Commercial  Consumer  Total 
   Amount   Weighted
Average

Rate
  Amount   Weighted
Average

Rate
  Amount   Weighted
Average

Rate
  Amount   Weighted
Average

Rate
 
   (Dollars in thousands) 

Due During the Twelve Months Ending December 31,

             

2014

  $12,942     4.64 $1,921     5.58 $949     4.70 $40,301     5.19%% 

2015

   4,581     5.12    766     5.64    313     7.03    24,357     5.26

2016

   10,006     4.32    876     5.25    612     6.71    24,873     4.90

2017 to 2018

   5,458     4.61    1,812     5.78    432     5.71    38,509     5.45

2019 to 2023

   8,533     5.66    2,822     4.80    745     4.91    78,079     5.21

2024 to 2028

   7,420     6.06    0     —      81     7.95    81,542     4.59

2029 and beyond

   15,987     5.64    88     17.54    522     14.20    236,146     4.62
  

 

 

    

 

 

    

 

 

    

 

 

   

Total

  $64,927     5.14   $8,285     5.46   $3,654     6.90   $523,807     4.86
  

 

 

    

 

 

    

 

 

    

 

 

   

Longer term one- to four-family residential, construction, commercial real estate, and home equity loans and lines of credit typically carry interest rates which adjust to U.S. Treasury indices orThe Wall Street Journal Prime Rate. Longer term one- to-four family residential construction loans represent construction-permanent loans which, upon completion of the construction phase, become one- to four-family residential real estate loans.

The following table presents loans with predetermined interest rates and adjustable interest rates due after December 31, 2014.

   Due after December 31, 2014 
   Fixed   Adjustable   Total 
   (Dollars in thousands) 

Real estate loans:

      

One-to four-family residential

  $89,753    $132,144    $221,897  

Commercial

   44,598     91,182     135,780  

Home equity loans and lines of credit

   6,955     49,493     56,448  

One- to four-family residential construction

   2,174     6,153     8,327  

Other construction and land

   16,135     35,850     51,985  

Commercial

   2,317     4,047     6,364  

Consumer

   2,355     350     2,705  
  

 

 

   

 

 

   

 

 

 

Total loans

  $164,287    $319,219    $483,506  
  

 

 

   

 

 

   

 

 

 

As of December 31, 2013, our largest lending relationship was with a real estate investor, located in our primary market area. As of December 31, 2013, the borrower had 26 separate loans, with an aggregate principal loan balance of $9.8 million. Although the borrower was current with payments on the loans, its cash flows and reserves recently deteriorated and as a consequence the entire lending relationship was classified as impaired at December 31, 2013. All of the borrower’s loans have been placed on nonaccrual and total reserves of $2.3 million have been established.

The next nine largest lending relationships accounted for over 74 loans and had an aggregate principal loan balance of $45.7 million as of December 31, 2013. All of these next nine largest lending relationships, which had loan balances ranging from $3.7 million to $6.4 million, were performing and were not classified or impaired as of December 31, 2013.

Delinquent Loans. When a loan become 15 days past due, we contact the borrower to inquire as to why the loan is past due. When a loan become 30 days or more past due, we increase collection efforts to include all available forms of communication. Once a loan becomes 45 days past due, we generally issue a demand letter and further explore the reasons for non-repayment, discuss repayment options, and inspect the collateral. In the event the loan officer or collections staff has reason to believe restructuring will be mutually beneficial to the borrower and the Bank, the borrower will be referred to the Bank’s Loss Mitigation Manager to explore restructuring alternatives to foreclosure. Once the demand period has expired and it has been determined that restructuring is not a viable option, the Bank’s counsel is instructed to pursue foreclosure.

The accrual of interest on loans is discontinued at the time a loan becomes 90 days delinquent or when it becomes impaired, whichever occurs first, unless the loan is well secured and in the process of collection. All interest accrued but not collected for loans that are placed on nonaccrual is reversed. Interest payments received on nonaccrual loans are generally applied as a direct reduction to the principal outstanding until the loan is returned to accrual status. Interest payments received on nonaccrual loans may be recognized as income on a cash basis if recovery of the remaining principal is reasonably assured. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Interest payments applied to principal while the loan was on nonaccrual may be recognized in income over the remaining life of the loan after the loan is returned to accrual status.

If a loan is modified in a TDR, the loan is generally placed on non-accrual until there is a period of satisfactory payment performance by the borrower (either immediately before or after the restructuring), generally six consecutive months, and the ultimate collectability of all amounts contractually due is not in doubt.

The following table sets forth certain information with respect to our loan portfolio delinquencies at the dates indicated. We have no loans past due 90 days and over that are still accruing interest.

   Delinquent loans 
   30-89 Days
Amount
  90 Days and over
(Non-Accrual)
Amount
  Total
Amount
 
   (Dollars in thousands) 

At December 31, 2013

    

Real estate loans:

    

One- to four-family residential

  $6,208   $2,587   $8,795  

Commercial

   4,799    722    5,521  

Home equity loans and lines of credit

   342    350    692  

One- to four-family residential construction

   120    —      120  

Other construction and land

   684    970    1,654  

Commercial

   35    —      35  

Consumer

   27    —      27  
  

 

 

  

 

 

  

 

 

 

Total loans

  $12,215   $4,629   $16,844  
  

 

 

  

 

 

  

 

 

 

% of total loans, net

   2.34  0.89  3.23
  

 

 

  

 

 

  

 

 

 

At December 31, 2012

    

Real estate loans:

    

One- to four-family residential

  $7,413   $4,018   $11,431  

Commercial

   8,961    2,372    11,333  

Home equity loans and lines of credit

   935    785    1,720  

One- to four-family residential construction

   302    194    496  

Other construction and land

   1,277    6,234    7,511  

Commercial

   55    12    67  

Consumer

   15    —      15  
  

 

 

  

 

 

  

 

 

 

Total loans

  $18,958   $13,615   $32,573  
  

 

 

  

 

 

  

 

 

 

% of total loans, net

   3.38  2.43  5.81
  

 

 

  

 

 

  

 

 

 

At December 31, 2011

    

Real estate loans:

    

One- to four-family residential

  $7,981   $12,706   $20,687  

Commercial

   8,913    4,530    13,443  

Home equity loans and lines of credit

   1,152    1,826    2,978  

One- to four-family residential construction

   867    1,396    2,263  

Other construction and land

   5,373    10,360    15,733  

Commercial

   183    39    222  

Consumer

   36    37    73  
  

 

 

  

 

 

  

 

 

 

Total loans

  $24,505   $30,894   $55,399  
  

 

 

  

 

 

  

 

 

 

% of total loans, net

   3.98  5.02  9.00
  

 

 

  

 

 

  

 

 

 

At December 31, 2010

    

Real estate loans:

    

One-to four-family residential

  $5,948   $17,525   $23,473  

Commercial

   7,179    4,906    12,085  

Home equity loans and lines of credit

   1,674    1,362    3,036  

One- to four-family residential construction

   475    1,777    2,252  

Other construction and land

   5,600    20,661    26,261  

Commercial

   185    957    1,142  

Consumer

   90    9    99  
  

 

 

  

 

 

  

 

 

 

Total loans

  $21,151   $47,197   $68,348  
  

 

 

  

 

 

  

 

 

 

% of total loans, net

   2.96  6.60  9.55
  

 

 

  

 

 

  

 

 

 

At December 31, 2009

    

Real estate loans:

    

One-to four-family residential

  $4,664   $8,407   $13,071  

Commercial

   2,037    3,477    5,514  

Home equity loans and lines of credit

   2,466    1,960    4,426  

One- to four-family residential construction

   2,974    1,294    4,268  

Other construction and land

   5,639    4,289    9,928  

Commercial

   237    275    512  

Consumer

   203    22    225  
  

 

 

  

 

 

  

 

 

 

Total loans

  $18,220   $19,724   $37,944  
  

 

 

  

 

 

  

 

 

 

% of total loans, net

   2.36  2.56  4.92
  

 

 

  

 

 

  

 

 

 

Total delinquencies as a percentage of net loans have decreased from a high of 9.55% at December 31, 2010 to 5.81% at December 31, 2012, and 3.23% at December 31, 2013, representing a decrease of 66.2% between December 31, 2010 and December 31, 2013. Loans past due 90 days and over and on non-accrual have experienced a similar decline, decreasing from a high of 6.60% at December 31, 2010, to 2.43% at December 31, 2012, and 0.89% at December 31, 2013, a decrease of 86.5% between December 31, 2010 and December 31, 2013. The decrease in delinquencies is consistent with the improving economic health of our primary market area.

The following table presents interest income lost on non-accrual loans for the periods indicated.

   For the years ended 
   December 31,   December 31,   December 31, 
   2013   2012   2011 
   (Dollars in thousands) 

Gross interest income

  $247    $917    $2,317  

Interest income recognized

   32     170     376  
  

 

 

   

 

 

   

 

 

 

Interest income foregone

  $215    $747    $1,941  
  

 

 

   

 

 

   

 

 

 

Non-performing Assets. Non-performing assets include loans past due 90 days and over and on non-accrual status, impaired loans that are current, TDR loans that are current but have not yet established a satisfactory period of payment performance, and REO. The table below sets forth the amounts and categories of our non-performing assets at the dates indicated.

   At December 31, 
   2013  2012  2011  2010  2009 
   (Dollars in thousands) 

Non-accrual loans:

      

Real estate loans:

      

One- to four-family residential

  $2,794   $5,367   $15,985   $21,118   $8,450  

Commercial(1)

   10,212    4,664    8,015    9,338    4,445  

Home equity loans and lines of credit

   350    852    2,668    1,362    1,960  

One- to four-family residential construction

   —      655    1,396    1,777    1,294  

Other construction and land

   2,068    6,176    13,405    25,822    4,922  

Commercial

   190    12    42    1,056    345  

Consumer

   13    1    38    9    22  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total non-performing loans

   15,627    17,727    41,549    60,482    21,438  

REO:

      

One- to four-family residential

   1,076    3,779    4,807    4,727    6,061  

Commercial

   2,988    5,049    3,255    2,244    858  

One- to four-family residential construction

   210    1,176    700    985    426  

Other construction and land

   6,232    9,751    8,068    13,555    15,484  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total foreclosed real estate

   10,506    19,755    16,830    21,511    22,829  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total non-performing assets

  $26,133   $37,482   $58,379   $81,993   $44,267  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Troubled debt restructurings still accruing

  $23,015   $21,408   $17,624   $15,095   $22,263  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ratios:

      

Non-performing loans to total loans

   2.99  3.16  6.75  8.45  2.78

Non-performing assets to total assets

   3.33  4.87  6.67  8.02  4.10

(1)See the below description of the impairment of a $ 9.8 million loan relationship during 2013, which accounts for a significant portion of our non-performing commercial real estate loans as of December 31, 2013.

Total non-performing loans as a percentage of total loans decreased from a high of 8.45% at December 31, 2010, to 3.16% at December 31, 2012, and 2.99% at December 31, 2013, representing a decrease of 64.6% between December 31, 2010 and December 31, 2013. Similarly, total non-performing assets as a percentage of total assets decreased from a high of 8.02% at December 31, 2010, to 4.87% at December 31, 2012, and 3.33% at December 31, 2012, representing a decrease of 58.5% between December 31, 2010 and December 31, 2013. This decrease in non-performing loans and non-performing assets is due to a combination of the improving economy and the Bank’s aggressive resolution and disposal of non-performing loans and non-performing assets by means of restructure, foreclosure, deed in lieu of foreclosure and short sales for less than the amount of the indebtedness, in which cases the deficiency is charged-off.

Non-performing commercial real estate loans increased $5.5 million to $10.2 million at December 31, 2013, from $4.7 million at December 31, 2012. This increase was primarily related to the Bank reclassifying a $9.8 million loan relationship as impaired, and moving the loans to non-accrual status as of December 31, 2013. Although the borrower was current with its loan payments, its cash flows and reserves recently deteriorated and as a consequence the entire lending relationship was classified as impaired at December 31, 2013. All of the borrower’s loans have been placed on nonaccrual and total reserves of $2.3 million have been established.

The next largest lending relationship placed on nonaccrual as of December 31, 2013, was a $0.7 million TDR loan secured by owner-occupied commercial real estate located in western North Carolina. This TDR loan has been performing since it was restructured, and consequently was returned to accrual status in January 2014, following six consecutive months of amortizing payments.

Troubled Debt Restructurings (TDR). In situations where, for economic or legal reasons related to a borrower’s financial difficulties, we grant a concession, for other than an insignificant period of time, that we would not otherwise grant, the related loan is classified as a TDR. We strive to identify borrowers in financial difficulty early in order that we may work with them to modify their loans before they reach nonaccrual status. Modified terms generally include extensions of maturity dates at a stated interest rate lower than the current market rate for a new loan with similar risk characteristics, reductions in contractual interest rates, periods of interest-only payments, and principal deferments. While unusual, there may be instances of forgiveness of loan principal. We individually evaluate all substandard loans that experienced a modification of terms to determine if a TDR has occurred.

All TDRs are considered to be impaired loans and are reported as such for the remaining life of the loan, unless the restructuring agreement specifies an interest rate equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk and the ultimate collectability of all amounts contractually due is not in doubt.

The following table presents our TDRs as of the dates indicated.

   At December 31 
   2013   2012   2011 
   (Dollars in thousands) 

TDRs still accruing interest:

  $23,015    $21,408    $17,624  

TDRs not accruing interest:

   1,975     5,450     11,855  
  

 

 

   

 

 

   

 

 

 

Total TDRs

  $24,990    $26,858    $29,479  
  

 

 

   

 

 

   

 

 

 

As noted in the above table, the majority of our borrowers with restructured loans have been able to comply with the revised payment terms for at least six consecutive months, resulting in their respective loans being restored to accrual status. This pattern accounts for the increasing trend in accruing TDR loans and decreasing trend in non-accruing TDR loans, as noted in the above table.

The following table presents details of TDRs made in each of the years indicated.

Year

Ended
December 31,

  

Modification Type

  Number of
TDR Loans
   Pre-Modification
Recorded
Investment
   Post-Modification
Recorded
Investment
 
          (Dollars in thousands) 
2013  Interest rate concessions   7    $2,551    $2,150  
  Extended payment terms   2     677     372  
    

 

 

   

 

 

   

 

 

 
  Total   9    $3,228    $2,522  
2012  Interest rate consessions   13    $7,401    $6,086  
  Extended payment terms   2     929     684  
    

 

 

   

 

 

   

 

 

 
  Total   15    $8,330    $6,770  
2011  Interest rate concessions   16    $7,375    $6,325  
  Extended payment terms   3     3,902     3,902  
    

 

 

   

 

 

   

 

 

 
  Total   19    $11,277    $10,227  

As indicated in the above table, both the number and the aggregate value of TDRs made during 2012 and 2013 have declined when compared against the previous year. These year-on-year reductions reflect improving economic conditions resulting in fewer borrowers requesting or requiring concessions.

Classification of Loans.Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality including “substandard,” “doubtful”, or “loss.” An asset is considered “substandard” if it displays an identifiable weakness without appropriate mitigating factors where there is the distinct possibility that we will sustain some loss if deficiencies are not corrected. “Substandard” loans may include some deterioration in repayment capacity and/or loan-to-value of underlying collateral. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that collection in full is highly questionable or improbable. Assets classified as “loss” are those considered uncollectible and of such little value that their continuance as assets is not warranted. Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve our close attention, are designated as “special mention.”

We maintain an allowance for loan losses at an amount estimated to equal all credit losses incurred in our loan portfolio that are both probable and reasonable to estimate at the balance sheet date. We review our asset portfolio no less frequently than quarterly to determine whether any assets require classification in accordance with applicable regulatory guidelines.

The following table sets forth amounts of classified and criticized loans at the dates indicated. As indicated in the table, loans classified as “doubtful” or “loss” are charged off.

   At December 31, 
   2013  2012  2011  2010  2009 
   (Dollars in Thousands) 

Classified loans:

      

Substandard

  $47,019   $58,864   $86,170   $113,178   $92,685  

Doubtful

   —      —      —      —      —    

Loss

   —      —      —      —      —    
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total classified loans

   47,019    58,864    86,170    113,178    92,685  

As a % of total loans

   9.01  10.50  14.00  15.82  12.01

Special mention

   37,670    61,698    63,839    64,386    27,356  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total criticized loans

  $84,689   $120,562   $150,009   $177,564   $120,041  

As a % of total loans

   16.23  21.50  24.37  24.82  15.55%

As indicated in the above table, total classified loans as a percentage of total loans decreased 35.6% between December 31, 2011, and December 31, 2013 and total criticized loans decreased 33.4% over the same period. These reductions reflect an improving economy and an increasing number of criticized loans being paid off or upgraded as a consequence of improvements in our borrowers’ cash flows and collateral values

Allowance for Loan Losses. The allowance for loan losses reflects our estimates of probable losses inherent in our loan portfolio at the balance sheet date. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of our loans in light of historical experience, the nature and volume of our loan portfolio, adverse situations that may affect our borrowers’ abilities to repay, the estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The methodology for determining the allowance for loan losses has two main components: the evaluation of individual loans for impairment and the evaluation of certain groups of homogeneous loans with similar risk characteristics.

A loan is considered impaired when it is probable that we will be unable to collect all principal and interest payments due according to the original contractual terms of the loan. We individually evaluate all loans classified as “substandard” or nonaccrual. If the impaired loan is considered collateral dependent, a charge-off is taken based upon the appraised value of the property (less an estimate of selling costs if foreclosure is anticipated). If the impaired loan is not collateral dependent, a specific reserve is established based upon an estimate of the future discounted cash flows after consideration of modifications and the likelihood of future default and prepayment.

The allowance for homogenous loans consists of a base loss reserve and a qualitative reserve. The base loss reserve utilizes a weighted average loss rate for the last 16 quarters, with the most recent four quarters weighted more heavily than the least recent four quarters. The loss rates for the base loss reserve are segmented into 13 loan categories and contain loss rates ranging from approximately 1% to 14%.

The qualitative reserve adjusts the weighted average loss rates utilized in the base loss reserve for trends in the following internal and external factors:

Non-accrual and classified loans

Collateral values

Loan concentrations

Economic conditions – including unemployment rates, building permits, and a regional economic index.

Qualitative reserve adjustment factors range from -10 basis points for a favorable trend to +30 basis points for a highly unfavorable trend. These factors are subject to adjustment as economic conditions change.

The following table sets forth activity in our allowance for loan losses at the dates and for the periods indicated.

   At or for the years ended December 31, 
   2013  2012  2011  2010  2009 
   (Dollars in thousands) 

Balance at beginning of period

  $ 14,874   $ 16,710   $17,195   $ 17,772   $ 13,167  

Charge-offs:

      

Real Estate:

      

One- to four-family residential

   1,283    2,510    6,140    3,218    3,057  

Commercial

   2,209    1,850    4,202    1,503    360  

Home equity loans and lines of credit

   760    1,617    2,557    3,473    2,479  

One- to four-family residential construction

   193    391    1,043    2,044    2,942  

Other construction and land

   1,512    4,151    12,417    9,646    9,751  

Commercial

   17    295    1,199    582    478  

Consumer

   675    821    1,288    268    294  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total charge-offs

   6,649    11,636    28,846    20,734    19,361  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Recoveries:

      

Real Estate:

      

One- to four-family residential

   433    479    540    153    198  

Commercial

   125    249    484    48    11  

Home equity loans and lines of credit

   22    107    513    251    22  

One- to four-family residential construction

   111    51    88    153    853  

Other construction and land

   539    642    2,251    525    943  

Commercial

   31    124    103    65    19  

Consumer

   407    270    266    36    69  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total recoveries

   1,668    1,922    4,245    1,231    2,115  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net charge-offs

   4,981    9,714    24,601    19,503    17,246  

Provision for loan losses

   4,358    7,878    24,116    18,926    21,851  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance at end of period

  $14,251   $14,874   $16,710   $17,195   $17,772  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ratios:

      

Net charge-offs to average loans outstanding

   0.93  1.66  3.67  2.61  2.17

Allowance to non-performing loans at period end

   91.19  83.91  40.22  28.43  82.90

Allowance to total loans at period end

   2.73  2.65  2.71  2.40  2.30

Years of charge-offs in allowance for loan losses

   2.86    1.53    0.68    0.88    1.03  

As indicated in the above table, our net charge-offs to average loans have declined from a high of 3.67% for the year ended December 31, 2011, to 1.66% and 0.93% for the years ended December 31, 2012 and 2013, respectively, representing a decrease of 74.7% between December 31, 2011 and December 31, 2013. At the same time, we have been cautious about reducing the level of our allowance for loan loss prematurely and have avoided taking a negative provision. This decision has allowed our nonperforming loan coverage ratio to rise from a low 28.43% at December 31, 2010 to 83.91% at December 31, 2012 and 91.19% at December 31, 2013, representing a 220.8% increase between December 31, 2010 and December 31, 2013. Our allowance for loan losses to total loans at December 31, 2013 totaled 2.73%, which represents a reserve of approximately 2.86 years. This compares favorably to December 31, 2011, when our allowance approximated only 0.68 years of charge-offs.

We have restructured some of our loans using an “A/B” note process. Using this process, the “B” note is charged off, and the remaining “A” note may be returned to performing status if the borrower demonstrates its

ability to repay by timely paying at least six consecutive months of amortizing payments. Through December 31, 2013, we have restructured 10 notes with resulting “B” notes totaling $2.7 million being charged off. These “A” notes are included in our TDRs and only one in the amount of $0.7 million was still in nonaccrual status as of December 31, 2013.

Allocation of Allowance for Loan Losses.The following table provides details of the allowance for loan losses allocated by loan category at the dates indicated. The allowance for loan losses 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.

  At December 31,  At December 31, 
  2013  2012  2011  2010  2009 
  Allowance  % of
Loans
to
Total
Loans
  Allowance  % of
Loans
to
Total
Loans
  Allowance  % of
Loans
to
Total
Loans
  Allowance  % of
Loans
to
Total
Loans
  Allowance  % of
Loans
to
Total
Loans
 
  (Dollars in thousands) 

Real estate loans:

          

One- to four-family residential

 $3,693    43.1 $4,620    40.5 $4,571    37.5 $4,097    35.4 $3,820    31.6

Commercial

  4,360    29.7    2,973    30.8    4,338    29.3    4,206    28.0    3,146    25.4  

Home equity loans and lines of credit

  1,580    10.9    2,002    11.0    1,562    11.2    1,428    10.5    2,392    11.7  

One- to four-family residential construction

  501    1.7    429    1.8    397    1.5    540    2.2    878    3.7  

Other construction and land

  3,516    12.4    4,059    13.6    5,456    18.3    6,638    21.2    6,603    24.7  

Commercial business

  336    1.6    379    1.8    300    1.7    236    2.1    823    2.1  

Consumer

  265    0.7    412    0.5    86    0.5    50    0.6    110    0.8  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 $14,251    100.1 $14,874    100.0   $16,710    100.0 $17,195    100.0 $17,772    100.0
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

We compute our allowance either through a specific allowance to individually impaired loans or through a general allowance applied to homogeneous loans by loan type. The above allocation represents the allocation of the allowance by loan type of all loans regardless of specific or general calculations. The largest allocation proportionate to outstanding balances has been made to other construction and land loans and commercial real estate loans.

Impaired LoansThe following table shows recorded loan balances, the unpaid principal balances, partial charge-offs, and specific allowances for impaired loans as of the dates indicated. The table also shows the sum of the specific allowances and partial charge-offs expressed as a percentage of the unpaid principal balance.

      Recorded
Balance
   Unpaid
Principal
Balance
   Partial
Charge-
Offs
   Specific
Allowance
   % of
Specific Allowance
& Partial Charge-off
to Unpaid Principal
Balance
 
      (Dollars in thousands) 
2013  Loans without a valuation allowance  $19,282     21,783     2,501     —       11.5
  Loans with a valuation allowance   20,788     20,788     —       4,068     19.6
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  Total  $40,070     42,571     2,501     4,068     15.4
2012  Loans without a valuation allowance  $16,091     17,999     1,908     —       10.6
  Loans with a valuation allowance   18,645     19,220     575     3,386     20.6
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  Total  $34,736     37,219     2,483     3,386     15.8
2011  Loans without a valuation allowance  $18,466     24,922     6,456     —       25.9
  Loans with a valuation allowance   14,073     14,167     94     2,549     18.7
    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  Total  $32,539     39,089     6,550     2,549     23.3

As indicated in the above table, during the period presented, we have consistently maintained between 15.4% and 23.3% of impaired loans in a reserve, either through a direct charge-off or in a specific reserve included as part of the allowance for loan losses. The balance in impaired loans has grown from December 31, 2011, through December 31, 2013, in part, because of the inclusion of TDRs, which are accounted for as impaired loans for the remainder of the life of such loan.

Real Estate Owned (REO).The table below summarizes the balances and activity in REO at the dates and for the periods indicated.

   2013  2012  2011 
   (Dollars in thousands) 

One- to four-family residential

  $1,076   $3,779   $4,807  

One- to four-family residential contruction

   210    1,176    700  

Commercial Real Estate

   2,988    5,049    3,255  

Other Construction and Land

   6,232    9,751    8,068  
  

 

 

  

 

 

  

 

 

 

Total

  $10,506   $19,755   $16,830  
  

 

 

  

 

 

  

 

 

 

Balance, beginning of year

  $19,755    16,830    21,512  

Additions

   8,651    21,295    20,610  

Disposals

   (11,262  (16,433  (21,551

Writedowns

   (4,093  (2,089  (6,042

Other

   (2,545  152    2,301  
  

 

 

  

 

 

  

 

 

 

Balance, end of year

  $10,506   $19,755   $16,830  
  

 

 

  

 

 

  

 

 

 

As indicated in the above table, the balance in REO has decreased by 37.6%, or $6.3 million, from a balance of $16.8 million at December 31, 2011 to a balance of $10.5 million at December 31, 2013 . This decrease reflects a significant reduction in the amount of additional REO in 2013 as compared to 2012 and 2011, REO disposals in 2013 exceeding the amount of additions for the same period, and aggregate write-downs of $12.2 million over the three-year period.

As of December 31, 2013, our REO with the highest balance ($1.2 million) consisted of approximately 14 acres of commercial land with frontage on US Highway 441 in Franklin, NC. The land is located in close proximity to our corporate office. The current book balance is net of a $0.6 million sale of approximately eight acres in September 2013. The property was acquired in September 2009 and most recently valued in November 2013 and is being actively marketed through a local real estate broker.

Investment Securities. Our investment securities portfolio is classified as both “available-for-sale” and “held-to-maturity”. Available-for-sale securities are carried at fair value. The following table shows the amortized cost and fair value for our available for sale investment portfolio at the dates indicated.

   At December 31, 
   2013   2012   2011 
   Amortized
Cost
   Fair value   Amortized
Cost
   Fair value   Amortized
Cost
   Fair value 
   (Dollars in thousands) 

Investment securities available-for-sale:

            

U.S. Government and agency securities:

            

U.S. Government and agency obligations

  $3,557    $3,492    $7,760    $7,758    $28,231    $28,271  

U.S. Government structured agency obligations

   19,420     18,407     22,018     21,983     28,010     28,087  

Municipal obligations

   26,963     25,602     18,515     18,943     35,070     36,772  

Mortgage-backed securities:

            

U.S. Government agency

   88,818     86,224     70,314     71,796     86,246     88,504  

SBA securities

   18,472     18,162     7,071     7,421     3,039     3,338  

Collateralized mortgage obligations

   3,141     3,029     2,535     2,605     5,174     5,218  

Mutual Funds

   576     568     564     585     543     560  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total securities available-for-sale

  $160,947    $155,484    $128,777    $131,091    $186,313    $190,750  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Available-for-sale investment securities increased $24.4 million, or 18.6%, to $155.5 million at December 31, 2013, from $131.1 million at December 31, 2012, primarily as a result of a decline in the demand for loans by qualified borrowers, combined with an increase in deposit balances and FHLB advances during the year ended December 31, 2013.

Held-to-maturity investment securities are carried at cost. The following table shows the amortized cost and fair value for our held-to-maturity investment portfolio as of the most recent year end.

   At December 31, 
   2013 
   Amortized
Cost
   Fair value 
   (Dollars in thousands) 

Investment securities held-to-maturity:

    

U.S. Government and agency securities:

    

U.S. Government structured agency obligations

  $20,988     20,098  
  

 

 

   

 

 

 

Total securities held-to-maturity

  $20,988     20,098  
  

 

 

   

 

 

 

Held-to-maturity investment securities increased $21.0 million to $21.0 million at December 31, 2013 from $0.0 million at December 31, 2012, principally as a result of reclassification of U. S. Government structured agency obligations from available-for-sale to held-to-maturity. The reclassification will remain in effect until the investments are called or mature. We reclassified these securities to minimize the impact of future interest rates or accumulated other comprehensive income (loss). The difference between the book values and fair values at the date of the transfer will continue to be reported in a separate component of accumulated other comprehensive income, and will be amortized into income over the remaining life of the security as an adjustment of yield in a manner consistent with the amortization of a premium. Concurrently, the revised book values of the transferred securities (represented by the market value on the date of transfer) are being amortized back to their par values over the remaining life of the securities as an adjustment of yield in a manner consistent with the amortization of a discount.

The following table summarizes unrealized losses on investment securities as of the dates indicated.

   12 Months or Less   More Than 12 Months   Total 
   #
Securities
   Fair
Value
   Unrealized
Losses
   #
Securities
   Fair
Value
   Unrealized
Losses
   #
Securities
   Fair
Value
   Unrealized
Losses
 
   (Dollar in Thousands) 

2013

   101    $135,054     5,832     13    $12,335    $1,209     114    $147,389    $7,041  

2012

   31    $38,842     228     1    $461    $36     32    $39,303    $264  

2011

   9    $17,352     64     6    $3,739    $464     15    $21,091    $528  

As indicated in the above table, the number and dollar amount of securities with an unrealized loss in both of the categories increased significantly between December 31, 2012 and December 31, 2013. We have concluded that this increase in unrealized losses is due entirely to an increase in interest rates. For example, five year U. S. Treasury yield increased from 0.72% at December 31, 2012, to 1.75% at December 31, 2013. Similarly, the 10 year U. S. Treasury yield increased from 1.78% to 3.04% over the same time period. We regularly review our investment portfolio for “other than temporary impairment”, or OTTI, and concluded that no OTTI existed during the years ended December 31, 2013, 2012 and 2011. In addition, we do not intend to sell these securities, nor is it more likely than not that we would be required to sell these securities before their anticipated collection dates.

We closely monitor the financial condition of the issuers of our municipal securities, as we consider these securities carry the greatest risk of a potential OTTI to our portfolio. Our municipal securities portfolio consists of approximately 63.8% of general obligation bonds and 36.2% of revenue bonds. At December 31, 2013, 2012 and 2011, all municipal securities were performing. The table below presents the ratings by either Standard and Poors or Moody’s as of the date indicated.

   2013   2012 
   Number of
Securities
   Fair Value   Number of
Securities
   Fair Value 

AA- or better

   51    $23,663     33    $17,368  

Baa1

   1     492     0     —    

BBB+

   1     387     1     461  

Not Rated

   2     1,060     2     1,114  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   55    $25,602     36    $18,943  
  

 

 

   

 

 

   

 

 

   

 

 

 

Investment Portfolio Maturities and Yields.The composition and maturities of the available-for-sale investment securities portfolio at December 31, 2013 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. Municipal securities yields have been adjusted for a 34% federal tax rate. None of the securities in our available-for-sale securities portfolio are due in one year or less.

  Through five years  Through ten years  More than ten years  Total securities 
  Amortized
Cost
  Weighted
Average
Yield
  Amortized
Cost
  Weighted
Average
Yield
  Amortized
Cost
  Weighted
Average
Yield
  Amortized
Cost
  Fair Value  Weighted
Average
Yield
 
  (Dollars in thousands) 

US Government and agency securities:

         

Agency Securities

 $3,557    1.20 $—      —   $—      —   $3,557   $3,492    1.20

Structured Obligations

  —      —      14,500    1.59    4,920    1.80    19,420    18,407    1.65  

Municipal tax exempt (1)

  —      —      —      —      8,772    6.38    8,772    8,691    6.38  

Municipal taxable

  728    1.84    3,655    2.54    13,808    3.16    18,191    16,911    2.98  

Mortgage-backed securities:

         

Agency

  —      —      29,735    1.95    59,083    2.51    88,818    86,224    2.33  

SBA

  815    0.96    5,799    1.95    11,858    2.61    18,472    18,162    2.32  

CMO

  —      —      88    3.99    3,053    1.94    3,141    3,029    2.00  

Mutual Fund

  —      —      —      —      576    2.08    576    568    2.08  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total securities available-for-sale

 $5,100    1.25 $53,777    1.90 $102,070    2.89 $160,947   $155,484    2.51
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(1)Municipal obligations are shown at a federal 34% tax equivalent yield

The composition and maturities of the held-to-maturity securities portfolio at December 31, 2013 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur.

   More than 10 years  Total securities 
   Amortized
Cost
   Weighted
Average
Yield
  Amortized
Cost
   Fair Value   Weighted
Average
Yield
 

US Government and agency:

         

Structured obligations

  $20,988     3.95 $20,988    $20,098     3.95
  

 

 

   

 

 

  

 

 

   

 

 

   

 

 

 

FHLB Stock. Our stock in the FHLB of Atlanta increased $0.3 million, or 12.5%, to $2.7 million at December 31, 2013, from $2.4 million at December 31, 2012. The amount of FHLB stock required to be owned by the Bank is determined by the amount of FHLB advances outstanding. The increase in our FHLB stock holding was the result of higher FHLB borrowings outstanding which increased from $25.0 million at December 31, 2012 to $40.0 million at December 31, 2013.

Bank Owned Life Insurance (BOLI).These policies are recorded at fair value based on cash surrender values provided by a third party administrator. BOLI increased $0.5 million to $20.0 million at December 31, 2013 from $19.5 at December 31, 2012. The following table summarizes the composition of BOLI as of the dates indicated:

   2013   2012 
   (Dollars in thousands) 

Separate

  $11,983     11,743  

General

   7,188     6,969  

Hybrid

   790     767  
  

 

 

   

 

 

 

Total BOLI

  $19,961     19,479 
  

 

 

   

 

 

 

The assets of the separate account BOLI are invested in the PIMCO Mortgage-backed Securities Account which is composed primarily of U.S. Treasury and U.S. Government agency sponsored mortgage-backed securities with a rating of Aaa and repurchase agreements with a rating of P-1.

Net Deferred Tax Assets.Deferred income tax assets and liabilities are determined using the asset and liability method and are reported net in the Consolidated Balance Sheets. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax basis of assets and liabilities and recognizes enacted changes in tax rate and laws. When deferred tax assets are recognized, they are subject to a valuation allowance based on management’s judgment as to whether realization is more likely than not. In determining the need for a valuation allowance, we considered the following sources of taxable income:

Future reversals of existing taxable temporary differences;

Future taxable income exclusive of reversing temporary differences and carry forwards;

Taxable income in prior carryback years; and

Tax planning strategies that would, if necessary, be implemented

As a result of the analysis above, we concluded that a valuation allowance was necessary as of December 31, 2013 and 2012. The recorded balance of deferred tax assets at December 31, 2013 and 2012 of $4.2 million represents the amount of tax planning strategies available to the Bank. The tax planning strategies utilized include converting tax free municipal income to taxable income, the intention and ability to hold securities with an unrealized loss, and the ability to create taxable gains on certain insurance policies.

Real Estate Held for Investment.Real estate held for investment increased by $2.5 million, to $2.5 million at December 31, 2013, from $0.0 million at December 31, 2012. During the year ended December 31, 2013, we acquired commercial real estate property through foreclosure and leased the property to an investor along with an option to purchase the property. The lease term is 51 months and includes escalating rental

payments. In addition, the investor has agreed to make, and has made, substantial repairs and improvements to the property during the lease term. The property was initially recorded at fair value as determined by an independent appraisal and is being depreciated over its estimated useful life.

Deposits. The following table presents average deposits by category, percentage of total average deposits and average rates for the periods indicated.

   For the years ended December 31, 
   2013  2012  2011 
   Average
Balance
   Percent  Weighted
Average
Rate
  Average
Balance
   Percent  Weighted
Average
Rate
  Average
Balance
   Percent  Weighted
Average
Rate
 
   (Dollars in thousands) 

Deposit type:

             

Savings accounts

  $25,625     3.8  0.14 $25,208     3.6  0.19 $23,515     3.0  0.62

Time deposits

   312,675     45.8    1.45    318,038     45.0    1.99    339,982     43.7    2.63  

Brokered CDs

   16,065     2.4    3.62    46,483     6.6    3.21    105,570     13.6    2.87  

Money market accounts

   181,558     26.6    0.62    187,692     26.6    0.74    188,256     24.2    1.04  

Interest-bearing demand accounts

   77,689     11.4    0.17    68,663     9.7    0.18    65,149     8.4    0.23  

Noninterest-bearing demand accounts

   68,519     10.0    —      60,663     8.6    —      54,859     7.1    —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

Total deposits

  $682,131     100.0  0.85 $706,747     100.0  1.12 $777,331     100.0  1.44
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

As indicated in the above table, average deposit balances decreased approximately $24.6 million, or 3.48%, during the year ended December 31, 2013, compared to the year ended December 31, 2012. The primary reason for the decline in average deposit balances, relates to the decline in brokered certificate of deposit accounts which decreased $30.4 million, or 65.4%, during the year ended December 31, 2013. Average demand accounts experienced an increase of $16.9 million, or 13.1%, to $146.2 million at December 31, 2013, from $129.3 million at December 31, 2012, as customer preferences changed.

The following table presents details of the applicable interest rates on our certificates of deposit at the dates indicated. The decrease in higher cost certificates of deposit is due to a combination of existing certificates of deposit maturing without renewal, and the re-pricing of retail certificates at lower rates.

   At December 31,   At December 31,   At December 31, 
   2013   2012   2011 
   (Dollars in thousands) 

Interest Rate:

      

Less than 2.00%

  $250,373    $242,412    $227,093  

2.00% to 3.99%

   72,491     86,866     182,087  

4.00% to 5.99%

   493     701     6,153  
  

 

 

   

 

 

   

 

 

 

Total

  $323,357    $329,979    $415,333  
  

 

 

   

 

 

   

 

 

 

The following table presents contractual maturities for certificates of deposits in amounts equal to or greater than $100 thousand.

   At December 31 
   2013 
   (Dollars in thousands) 

Three months or less

  $9,638  

Over three months through six months

   16,797  

Over six months through one year

   23,593  

Over one year to three years

   51,881  

Over three years

   33,750  
  

 

 

 

Total

  $135,659  
  

 

 

 

Borrowings. We have traditionally maintained a balance of borrowings from the FHLB of Atlanta using a combination of fixed borrowings, and fixed borrowings convertible to variable rates at the option for the FHLB. From time to time, we also borrow overnight funds from the FHLB of Atlanta, but had no overnight borrowings outstanding at December 31, 2013. FHLB advances are secured by qualifying one- to four-family permanent and commercial loans, by mortgage-backed securities, and by a blanket collateral agreement with the FHLB of Atlanta. We currently have $53.4 million of excess availability to borrow from the FHLB of Atlanta. In April 2013, we restructured $25.0 million of FHLB advances with an average rate of 3.19% to $25.0 million with an average rate of 2.41%.

The following table details the composition of our FHLB borrowings between fixed and adjustable rate advances as of December 31:

2013   2012 
Balance   Type  Rate  Maturity   Balance   Type  Rate  Maturity 
(Dollars in thousands) 
$5,000    

Fixed

   0.37  6/30/2015     10,000    

Fixed Convertible

   2.13  2/2/2015  
 5,000    

Fixed

   0.50  12/30/2015     15,000    

Fixed

   3.90  1/28/2019  
 5,000    

Fixed

   0.98  12/30/2016     —      —     —      —    
 10,000    

Fixed

   1.83  4/10/2019     —      —     —      —    
 15,000    

Variable

   2.80  4/10/2020     —      —     —      —    

 

 

     

 

 

    

 

 

     

 

 

  
$40,000       1.74    25,000       3.19 

 

 

     

 

 

    

 

 

     

 

 

  

The following table sets forth information concerning balances and interest rates on our FHLB advances at the dates and for the periods indicated.

   At or for the years ended December 31, 
   2013  2012  2011 
   (Dollars in thousands) 

Balance at end of period

  $40,000   $25,000   $52,400  

Average balance during period

   26,031    38,098    77,419  

Maximum outstanding at any month end

   40,000    49,900    128,400  

Weighted average interest rate at end of period

   1.74  3.19  3.12  

Weighted average interest rate during period

   2.58    3.25    3.74  

FHLB advances increased $15.0 million, or 60.0%, to $40.0 million at December 31, 2013, from $25.0 million at December 31, 2012. The $15.0 million increase in advances had a blended weighted interest rate of 0.62% and terms of 18 months to three years. This additional funding was secured to longer term funding at relatively low cost in anticipation of rising interest rates in the future and to improve the Bank’s interest rate risk profile.

At December 31, 2013, the Bank maintained an approximately $57.5 million credit line with the FRB discount window. For the years ending December 31, 2013, 2012 and 2011 the Bank had no outstanding borrowings with the FRB.

Junior Subordinated Notes. We had $14.4 million in junior subordinated notes outstanding at December 31, 2013, and 2012, payable to an unconsolidated subsidiary. These notes accrue interest at 2.80% above the 90-day LIBOR, adjusted quarterly. The effective interest rate was 3.05% and 3.11% at December 31, 2013 and December 31, 2012, respectively. Because of the dividend restrictions in the Consent Order, we have been deferring payment of dividends for 12 consecutive quarters. At December 31, 2013, we have deferred payments of interest on the notes in the amount of $1.6 million.

Deferred compensation and post-employment benefits.Deferred compensation and post-employment benefits declined $0.7 million or 6.4%, to $10.2 million at December 31, 2013 from $10.9 million at December 31, 2012. The decrease is a result of ongoing payments. All plans are frozen and no new participants may be added.

Equity.Total equity declined by $9.8 million, or 23.2%, to $32.5 million at December 31, 2013, from $42.3 million at December 31, 2012. This decrease was primarily the result of a decrease of $9.4 million in accumulated other comprehensive income due to an increase in net unrealized losses on securities available-for-sale and an increase in the deferred tax valuation allowance for unrealized losses on securities available for sale. A net loss of $0.4 million also contributed to the decline in total equity.

Comparison of Operating Results for the Fiscal Years Ended December 31, 2013 and 2012.

General. Our net income decreased $1.3 million, or 144.4%, to a net loss of $0.4 million for the year ended December 31, 2013, compared to net income of $0.9 million net income for the year ended December 31, 2012. Our loan loss provision declined $3.5 million, or 44.7%, for the year ended December 31, 2013, to $4.4

million from $7.9 million for the year ended December 31, 2012, and our gain on sale of loans increased $1.4 million, or 140.0%, to $2.4 million for the year ended December 31, 2013 from $1.0 million for the year ended December 31, 2012. These positive trends, however, were offset by increased losses on REO, which includes property valuation write-downs and losses on sales, which increased $1.0 million, or 30.3%, to $4.3 million for the year ended December 31, 2013, from $3.3 million during the year ended December 31, 2012.

Net Interest Income.Net interest income is the difference between interest income earned on interest-earning assets less interest expense on interest-bearing liabilities. The following table sets forth average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average tax-equivalent yields and costs for the periods indicated.All average balances are daily average balances.Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.

  For the year ended December 31, 
  2013  2012  2011 
  Average
Outstanding
Balance
  Interest  Yield/
Rate
  Average
Outstanding
Balance
  Interest  Yield/
Rate
  Average
Outstanding
Balance
  Interest  Yield/
Rate
 
  (Dollars in thousands) 

Interest-earning assets:

       

Loans, including loans held for sale

 $532,322   $27,164    5.10 $584,485   $30,431    5.21 $668,099   $34,008    5.09

Loans, Tax Exempt (1)

  1,766    101    5.71 $1,730   $127    7.36 $1,937   $150    7.74

Investments - taxable

  161,593    3,447    2.13  140,851    2,930    2.08  149,992    3,736    2.49

Investment securities - tax exempt (2)

  8,771    561    6.39  15,178    964    6.35  36,249    2,291    6.32

FHLB stock at cost

  2,203    59    2.68  4,495    86    1.91  9,045    80    0.88

Other interest earning assets

  1,897    179    9.44  1,334    176    13.19  1,400    127    9.07

Interest earning deposits

  13,978    30    0.21  11,693    17    0.15  17,375    2    0.01
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

Total interest-earning assets

  722,530    31,541    4.37  759,766    34,731    4.57  884,097    40,394    4.57
  

 

 

    

 

 

    

 

 

  

Noninterest-earning assets

  55,771      56,021      55,466    
 

 

 

    

 

 

    

 

 

   

Total assets

 $778,301     $815,787     $939,563    
 

 

 

    

 

 

    

 

 

   

Interest-bearing liabilities:

         

Savings accounts

 $25,625    36    0.14 $25,208    49    0.19 $23,515    145    0.62

Certificates of deposit

  328,740    4,534    1.38  364,521    6,314    1.73  445,552    8,953    2.01

Money market accounts

  181,558    1,122    0.62  187,692    1,393    0.74  188,256    1,956    1.04

Interest bearing transaction accounts

  77,689    134    0.17  68,663    127    0.18  65,149    150    0.23
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
         —     

Total interest bearing deposits

  613,612    5,826    0.95  646,084    7,883    1.22  722,472    11,204    1.55

FHLB advances

  26,031    672    2.58  38,098    1,238    3.25  77,419    2,899    3.74

Short term borrowings

  3    0    0.22  3    0    0.39  8    0    0.24

Junior Subordinated Debentures

  14,433    490    3.39  14,433    514    3.56  14,433    469    3.25
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

Total interest-bearing liabilities

  654,079    6,988    1.07  698,618    9,635    1.38  814,332    14,572    1.79
  

 

 

    

 

 

    

 

 

  

Noninterest-bearing deposits

  68,519      60,663      54,859    

Other non interest bearing liabilities

  14,677      13,862      14,410    
 

 

 

    

 

 

    

 

 

   

Total liabilities

  737,275      773,143      883,601    

Net worth

  41,026      42,644      55,962    
 

 

 

    

 

 

    

 

 

   

Total liabilities and net worth

 $778,301     $815,787     $939,563    
 

 

 

    

 

 

    

 

 

   

Tax equivalent net interest income

  $24,553     $25,096     $25,822   
  

 

 

    

 

 

    

 

 

  

Tax equivalent net interest rate spread (3)

    3.30    3.19    2.78

Net interest-earning assets (4)

 $68,451     $61,148     $69,765    
 

 

 

    

 

 

    

 

 

   

Tax equivalent net interest margin (5)

    3.40    3.30    2.92

Average interest-earning assets to interest-bearing liabilities

  1.10      1.09      1.09    

(1)Tax exempt loans are calculated giving effect to a 34% federal tax rate.
(2)Municipal securities are calculated giving effect to a 34% federal tax rate.
(3)Tax equivalent net interest rate spread represents the difference between the tax equivalent yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(4)Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(5)Tax equivalent net interest margin represents tax equivalent net interest income divided by average total interest-earning assets.

The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.

   For the years ended December 31,
2013 vs. 2012
  For the years ended December 31,
2012 vs. 2011
 
   Increase (decrease) due to  Total increase  Increase (decrease) due to  Total increase 
   Volume  Rate  (Decrease)  Volume  Rate  (Decrease) 
   (Dollars in thousands) 

Interest-earning assets:

       

Loans, including loans held for sale

  $(2,642 $(625  (3,267 $(4,359 $782   $(3,577

Loans, text exempt

  $3   $(29  (26 $(26 $3   $(23

Investment securities - taxable

   444    73    517    (218  (588  (806

Investment securities - tax exempt (2)

   (409  6    (403  (1,338  11    (1,327

FHLB stock at cost

   (54  27    (27  (54  60    6  

Other Interest Earning Assets

   62    (59  3    (6  55    49  

Interest-earning deposits

   4    9    13    (1  16    15  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total interest-earning assets

   (2,592  (598  (3,190  (6,002  339    (5,663
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Interest-bearing liabilities:

       

Savings accounts

   (1  14    13    (10  106    96  

Certificates of deposit

   581    1,199    1,780    1,495    1,144    2,639  

Money market accounts

   45    226    271    6    557    563  

Interest bearing transaction accounts

   (14  7    (7  (8  31    23  

FHLB advances

   340    226    566    1,320    341    1,661  

Short term borrowings

   —      —      0    —      —      —    

Junior subordinated debentures

   —      24    24    —      (45  (45
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total interest-bearing liabilities

   951    1,696    2,647    2,803    2,134    4,937  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Change in net interest income

  $(1,641 $1,098    (543 $(3,199 $2,473   $(726
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

(1)Non-accrual loans are included in the above analysis.
(2)Interest income on tax exempt securities is adjusted for a 34% federal tax rate

Tax equivalent net interest income decreased by $0.5 million, or 2.2%, to $24.6 million for the year ended December 31, 2013, from $25.1 million for the year ended December 31, 2012. As illustrated in the above table, the decrease reflects a reduction due to volume of $1.6 million, partially offset by an increase due to rates of $1.1 million.

The decrease of $1.6 million due to volume is primarily due to the effect of lower average loan balances which decreased $52.1 million in 2013 compared to 2012. This reduction was offset partially by lower levels of deposits and FHLB advances. The lower average loan balances are a result of several factors including high levels of loan payoffs, charge-offs, foreclosures and weak loan demand. The lower deposit balances are primarily a result of paying off higher cost brokered certificates of deposit.

The increase of $1.1 million due to rates is primarily due to the impact of lower average certificate of deposit rates which declined from 1.73% in 2012 to 1.38% in 2013 and lower rates on FHLB advances which declined from 3.25% in 2012 to 2.58% in 2013. The benefit of lower rates on certificates of deposit and FHLB advances was offset partially by lower rates on loans. As noted above, the lower certificate of deposit rates are a result of paying off higher cost brokered certificates of deposit balances. The lower rates on FHLB advances were the result of a $25 million restructuring of existing advances combined with several new advances at lower average rates.

Our tax-equivalent net interest rate spread increased by 11 basis points to 3.30% in 2013, compared to 3.19% in 2012, and our tax equivalent net interest margin increased 10 basis points to 3.40% in 2013, compared to 3.30% in 2012. The primary cause of these increases was a 31 basis point reduction in the cost of liabilities, driven by lower deposit and FHLB advance rates, which more than offset a 20 basis point decrease in asset yields, driven primarily by lower returns on loans.

Provision for Loan Losses. The provision for loan losses is the amount charged against earnings for the purpose of establishing an adequate allowance for loan losses. Our provision for loan losses decreased by $3.5 million, or 44.3%, to $4.4 million for the year ended December 31, 2013, from $7.9 million for the year ended December 31, 2012. The primary factor driving the decrease in the provision for loan losses was a $4.7 million decrease in net charge-offs to $5.0 million in 2013 from $9.7 million in 2012. The provision for loan losses as a percentage of net charge-offs totaled 87.5% and 81.1% for the years ended December 31, 2013 and 2012, respectively.

Noninterest Income.The following table summarizes the components of noninterest income and the corresponding change between the year ended December 31, 2013 and 2012:

   2013  2012  Change 

Servicing income, net

  $(126  (26  (100

Gain on sale of loans

   2,407    1,005    1,402  

Gain on sale of investments

   358    3,294    (2,936

Overdraft fees

   1,139    1,419    (280

ATM and debit fees

   1,009    967    42  

BOLI

   543    595    (52

Other

   1,059    960    99  
  

 

 

  

 

 

  

 

 

 

Total

  $6,389    8,214    (1,825)
  

 

 

  

 

 

  

 

 

 

The decline in noninterest income was primarily due to a decrease in gains from the sale of investments which declined $2.9 million in 2013 as compared to 2012. As a result of the rising interest rate environment during much of 2013, we were unable to realize the level of investment gains that we had realized in 2012. This decline was offset in part by an increase in gain on sale of loans of $1.4 million in 2013, as compared to 2012. This increase was a result of the historically low interest rates experienced during the summer of 2013 which led to a significant increase in refinance activity. Also adding to the increase in refinance activity was the availability of the House Affordable Refinance Program, or HARP, which permitted borrowers, that might not otherwise qualify, to refinance their mortgage loans.

Noninterest Expense.The following table summarizes the components of noninterest expense and the corresponding change between the years ended December 31, 2013 and 2012:

   2013   2012   Change 
   (Dollars in thousands) 

Compensation and employee benefits

  $11,428     10,057     1,371  

Net occupancy

   2,507     2,373     134  

Federal deposit insurance

   1,700     1,652     48  

Professional and advisory

   547     1,000     (453

Data processing

   893     751     142  

REO operations

   1,356     2,156     (800

REO valuation

   4,093     2,089     2,004  

Loss on sale of REO

   163     1,203     (1,040

Other

   3,553     3,772     (219
  

 

 

   

 

 

   

 

 

 
       —    

Total noninterest expenses

  $26,240     25,053     1,187 
  

 

 

   

 

 

   

 

 

 

Compensation and employee benefits expense increased by $1.4 million, or 13.6%, to $11.4 million in 2013 as compared to 2012. This increase resulted primarily from an increase of $.9 million in compensation expense and an increase of $.3 million in commissions and referrals related mostly to our mortgage originations business. Our number of full-time equivalent employees also increased to 185 at the end of 2013, as compared to 169 at the end of 2012.

Losses incurred on the periodic valuation of REO properties increased $2.0 million in 2013 as compared to 2012. These losses result from ongoing appraisals on REO properties, which are obtained not less frequently than annually. Expenses are also incurred in maintaining REO properties. REO expenses decreased by $0.8 million, or 37.1%, falling to $1.4 million in 2013 compared to $2.2 million in 2012. This reduction was primarily due to there being fewer properties held in 2013 as compared to 2012. “Loss” on sale of REO declined $1.0 million in 2013 as compared to 2012, primarily as a result of some stabilization of real estate prices in our principal market area.

Professional and advisory expenses declined $0.5 million in 2013 as compared to 2012, primarily due to increased expenses in 2012 related to the Consent Order.

Income Tax Expense.We recorded a $0.4 million income tax expense in our income tax provision for the year ended December 31, 2013. This expense primarily represented a change in the valuation allowance for unrealized gains and losses on investment securities available for sale. The $1.0 million income tax benefit recorded for the year ended December 31, 2012 primarily represents a change in the level of tax planning strategies.

Management of Market Risk

General. One of the most significant forms of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Interest rate fluctuations affect earnings by changing net interest income and other interest –sensitive income and expense levels. Interest rate changes affect capital by changing the net present value of bank’s future cash flows, and the cash flows themselves as rates change. Accepting this risk is normal part of banking and can be an important source of profitability and shareholder value. However, excessive risk can threaten a bank’s earnings, capital, liquidity and solvency. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our net interest income to changes in market interest rates. The Bank Board has established an Asset/Liability Management Committee (“ALCO Committee”), which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board. Our ALCO Committee monitors and manages market risk through rate shock analyses, economic value of equity, or EVE, analyses and simulations in order to avoid unacceptable earnings and market value fluctuations due to changes in interest rates.

Mortgage-backed securities are the single largest group within our investment securities portfolio, representing 58.3% of all securities at December 31, 2013. We sell our long-term fixed rate mortgages to the secondary markets, obtaining commitments to sell at locked-in interest rates prior to issuing a loan commitment. We expect to satisfy future funding requirements with retail deposits, including checking and

savings accounts, money market accounts and certificates of deposit generated within our markets. If our excess funding needs exceed our deposits, we will utilize our excess funding capacity with the FHLB of Atlanta. Deposits, exclusive of brokered certificates of deposit, increased to $672.7 million at December 31, 2013, from $651.9 million at December 31, 2012. Brokered deposits declined $11.7 million, or 50.4%, to $11.5 million at December 31, 2013, from $23.2 million at December 31, 2012.

We have taken the following steps to reduce our interest rate risk:

increased our personal and business checking accounts and our money market accounts, which are less rate-sensitive than certificates of deposit and which provide us with a stable, low-cost source of funds;

limited the fixed rate period on all loans within our portfolio

utilized our securities portfolio for positioning based on projected interest rate environments;

priced certificates of deposits to encourage customers to extend to longer terms;

utilized FHLB advances for positioning.

We have not conducted hedging activities, such as engaging in futures, options or swap transactions. In addition, changes in interest rates can affect the fair values of our financial instruments.

Economic Value of Equity(EVE).EVE is the difference between the present value of an institution’s assets and liabilities (the institution’s EVE) that would change in the event of a range of assumed changes in market interest rates. EVE is used to monitor interest rate risk beyond the 12 month time horizon of rate shocks. The simulation model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of EVE. The model estimated the economic value of each type of asset, liability and off-balance sheet contract using the current interest rate yield curve with instantaneous increases or decreases of 100 to 400 basis points in 100 basis point increments. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below. Given the current relatively low level of market interest rates, an NPV calculation for an interest rate decrease of greater than 100 basis points has not been prepared.

Certain shortcomings are inherent in the methodologies used in determining interest rate risk through changes in EVE. Modeling changes in EVE require making certain assumptions that may or may not reflect the manner in which actual yields and costs, or loan repayments and deposit decay, respond to changes in market interest rates. In this regard, the EVE information presented assumes 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 assumes that a particular change in interest rates is reflected across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the EVE information provides 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.

Net Interest Income.In addition to an EVE analysis, we analyze the impact of changing rates on our net interest income. Using our balance sheet as of a given date, we analyze the repricing components of individual assets, and adjusting for changes in interest rates at 100 basis point increments, we analyze the impact on our net interest income. Changes to our net interest income are shown in the following table based on immediate changes to interest rates in 100 basis point increments.

The table below reflects the impact of an immediate increase in interest rates in 100 basis point increments on Net Interest Income (NII) and Economic Value of Equity (EVE).

    December 31, 2013  December 31, 2012 

Change in Interest
Rates (basis points)

   % Change in Pretax
Net Interest Income
   % Change in Economic
Value of Equity
  % Change in Pretax
Net Interest Income
  % Change in Economic
Value of Equity
 
(Dollars in thousands)               
 +400     6.0     (24.2  12.4    (12.5
 +300     3.6     (21.1  9.0    (10.7
 +200     1.5     (15.7  5.7    (6.8
 +100     0.1     (9.1  2.7    (2.6
 0     —       —      —      —    
 -100     -5.1     5.1    (4.7  (3.3

The results from the rate shock analysis on NII and EVE are consistent with having an asset sensitive balance sheet. Having an asset sensitive balance sheet means more assets than liabilities will reprice during measured timeframes. The implications of an asset sensitive balance sheet will differ depending upon the change in market rates. For example, with an asset sensitive balance sheet in a declining interest rate environment, more assets than liabilities will decrease in interest rate. This situation could result in a decrease in NII and operating income. Conversely, with an asset sensitive balance sheet in a rising interest rate environment, more assets than liabilities will increase in rate. This situation could result in an increase in NII and operating income. As indicated in the table above, a 200 basis point increase in rates would result in a 1.5% increase in NII as of December 31, 2013 as compared to a 5.7% increase in NII as of December 31, 2012. A 200 basis point increase in rates would result in a 15.7% decrease in EVE as of December 31, 2013 as compared to a 6.8% decrease in EVE as of December 31, 2012.

Liquidity and Capital Resources

Liquidity is the ability to meet current and future financial obligations. Our primary sources of funds consist of deposit inflows, loan repayments, advances from the FHLB of Atlanta, repurchase agreements and maturities, proceeds from the sale of loans originated for sale, principal repayments and the sale of available-for-sale securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Our ALCO Committee, under the direction of our Chief Operating Officer, is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as

unanticipated contingencies. We believe that we have enough sources of liquidity to satisfy our short- and long-term liquidity needs as of December 31, 2013. We anticipate that we will maintain higher liquidity levels following the completion of this offering.

We regularly monitor and adjust our investments in liquid assets based upon our assessment of expected loan demand, expected deposit flows and borrowing maturities, yields available on interest-earning deposits and securities, and the objectives of our asset/liability management program.

Excess liquid assets are invested generally in FHLB of Atlanta and FRB interest-earning deposits and investment securities and are also used to pay off short-term borrowings and, in 2012 and 2013, brokered certificates of deposits.

Our most liquid assets are cash and cash equivalents. The level of these assets is dependent on our operating, financing, lending and investing activities during any given period. At December 31, 2013, cash and cash equivalents totaled $34.3 million. Included in this total is $23.3 million held at FRB and $1.9 million held at the FHLB of Atlanta in interest-earning assets.

Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Consolidated Statements of Cash Flows included in our Consolidated Financial Statements.

At December 31, 2013, we had $0.8 million in outstanding commitments to originate mortgage loans. In addition to commitments to originate mortgage loans, we had $76.3 million in unused lines of credit for home equity loans and $2.5 million for consumer and other lines. Certificates of deposit maturing within one year of December 31, 2013 totaled $134.6 million, or 19.7% of our total deposits.

Depending on market conditions, we may be required to pay higher rates on our deposits or other borrowings than we currently pay on certificates of deposit maturing on or before December 31, 2014. Based on historical experience and current market interest rates, we anticipate that following their maturity we will retain a large portion of our retail certificates of deposit with maturities of one year or less as of December 31, 2013.

Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Consolidated Statements of Cash Flows included in our Consolidated Financial Statements.

Our primary investing activity is originating loans. During the years ended December 31, 2013, 2012 and 2011, we experienced a net decrease in loans of $28.0 million, $26.9 million, and $60.7 million, respectively. During these same periods, the Bank acquired REO in satisfaction of loans of $8.7 million, $21.3 million and $20.6 million, respectively. The Bank received sales proceeds, net of funds used to improve REO, of $8.6 million, $11.9 million, and $12.3 million on subsequent REO sales, during these respective periods.

In addition to loans, we invest in securities that provide a source of liquidity, both through repayments and as collateral for borrowings. Our securities portfolio includes both callable securities (which allow the issuer to exercise call options) and mortgage-backed securities (which allow borrowers to prepay loans). Accordingly, a decline in interest rates would likely prompt issuers to exercise call options and borrowers to prepay higher-rate loans, so producing higher than otherwise scheduled cash flows. Prepayments, maturities, and calls in the

years ended December 31, 2013, 2012 and 2011 of $21.1 million, $29.4 million and $27.8 million, respectively, reflected an increase in the long end of the curve of interest rates with reduced levels of prepayments and calls compared to $43.2 million in 2010, when interest rates were still falling. For the years ended December 31, 2013, 2012 and 2011, we had net increases (decreases) in securities of $45.4 million, ($59.7) million, and ($26.0) million, respectively. Through 2013, we generally replaced declining loan balances with securities.

Financing activities consist primarily of activity in deposit accounts and FHLB advances. We experienced a net increase (decrease) in deposits of $9.1 million, ($75.4) million, and ($47.9) million for the years ended December 31, 2013, 2012 and 2011, respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our competitors, and by our need to fund earning assets.

Liquidity management is both a daily and long-term function of management. If we require more funds than we are able to generate locally, we have borrowing agreements with the FHLB of Atlanta, which provide an additional source of funds. FHLB advances increased by $15.0 million for the year ended December 31, 2013 and decreased $27.4 million and $76.0 million for the years ended December 31, 2012 and 2011, respectively, as overall demand for loans declined and retail deposits increased. At December 31, 2013, we had $93.4 million of collateral in place at the FHLB, consisting of eligible loans. This provided excess available credit of $53.4 million at December 31, 2013. Securities can also be used, but as of December 31, 2013, no securities are being used as collateral for FHLB borrowings. We have $6.8 million in securities pledged to the FHLB as collateral for public deposits. At December 31, 2013, the Bank had $148.1 million in unpledged securities.

Other than performing our annual funding line test, we have not used the FRB discount window since November, 2009. We had no FRB discount window borrowings outstanding at December 31, 2013 or 2012. At December 31, 2013, we had an available line of credit with the FRB discount window of approximately $57 million.

The Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based guidelines and framework under prompt corrective action provisions include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. Under the Consent Order, the Bank is required to maintain a tier I leverage capital ratio of not less than 8% and a total risk-based capital ratio of not less than 11%. See “Consent Order” on page         , “Net Worth and Capital Adequacy Requirements Applicable to the Bank” on page         .

The following table summarizes the required and actual capital ratios of the Bank as of the dates indicated:

   Actual  For Capital
Adequacy Purposes
  As required by the
Consent Order
 
   Amount   Ratio  Amount   Ratio  Amount   Ratio 
   (Dollars in thousands) 

As of December 31, 2013:

       

Tier 1 Leverage Capital (to average assets)

  $54,775     7.02 $31,190     ³4 $62,380     ³8

Tier 1 Risk-based Capital (to risk-weighted assets)

  $54,775     10.70 $20,484     ³4 $N/A     N/A  

Total Risk-based Capital (to risk-weighted assets)

  $61,274     11.97 $40,968     ³8 $56,331     ³11

As of December 31, 2012:

          

Tier 1 Leverage Capital (to average assets)

  $55,157     7.16 $30,835     ³4 $61,670     ³8

Tier 1 Risk-based Capital (to risk-weighted assets)

  $55,157     10.22 $21,594     ³4 $N/A     N/A  

Total Risk-based Capital (to risk-weighted assets)

  $62,005     11.49 $43,188     ³8 $59,384     ³11

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Commitments.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 represent our potential future cash requirements, a significant portion of 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, see Note 21. Commitments and Contingencies of the Notes to Consolidated Financial Statements included in this prospectus.

We are also required to periodically repurchase or reimburse Fannie Mae for representation and warranty losses incurred. These reimbursement losses have not been material, averaging approximately $116 per year over the last nine years of loss history. We maintained a reserve of $291 as of December 31, 2013, which we believe is adequate to cover any future reimbursement losses.

Contractual Obligations.In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities and agreements with respect to investments.

The following table summarizes our significant fixed and determinable contractual obligations and other funding needs by payment date at December 31, 2013. The payment amounts represent those amounts due to the recipient and do not include any unamortized premiums or discounts or other similar carrying amount adjustments.

   Payments due by period
At December 31, 2013
 

Contractual Obligations

  One year or
less
   More than
one year to
three years
   More than
three years to
five years
   More than
five years
   Total 

Deposits without a stated maturity (1)

  $360,869    $—      $—      $—      $360,869  

Certificates of Deposit (1)

   134,612     126,315     53,574     8,856     323,357  

Borrowings (1)

   —       15,000     —       25,000     40,000  

Junior subordinated debentures (1)

   —       —       —       14,433     14,433  

Operating leases

   79     120     —       —       199  

Deferred Compensation (1)

   —       —       —       389     389  

Non qualified compensation programs (1)

   1,032     1,910     1,721     4,595     9,258  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $1,111    $17,030    $1,721    $44,417    $64,279  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(1)Excludes interest

All borrowings referenced in the above table are FHLB advances. Operating lease amounts represent leases on branch offices in Saluda and Hendersonville, North Carolina. Non-qualified compensation programs are for existing plans for the benefit of our employees and directors.

Impact of the Patient Protection and Affordable Care Act (the “Affordable Care Act”)

We provide health insurance to our employees through an employee benefits trust sponsored by the North Carolina Bankers Association. The Trust has adopted and is in compliance with the affordability provisions of the Affordable Care Act. The impact of the Affordable Care Act on Bancorp has not been material and we do not expect any material impact in the future.

Impact of Inflation and Changing Prices

Our Consolidated Financial Statements and related notes have been prepared in accordance with GAAP. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration of changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.

SUPERVISION AND REGULATION

Bank holding companies and state savings banks are extensively regulated under both federal and state law. Set forth below is a brief description of certain regulatory requirements that are or will be applicable to us. The description below is limited to certain material aspects of the statutes and regulations addressed, and is not intended to be a complete description of such statutes and regulations and their effects on us. Supervision, regulation and examination by the bank regulatory agencies are intended primarily for the protection of depositors rather than shareholders of banks and bank holding companies. Statutes and regulations which contain wide-ranging proposals for altering the structures, regulations and competitive relationship of financial institutions are introduced regularly. We cannot predict whether, or in what form, any proposed statute or regulation will be adopted or the extent to which our business or the business of the Bank may be affected by such statute or regulation.

Memoranda of UnderstandingRegulatory Agreements

Consent Order.In September 2009, during a regularly scheduled, periodic examination of the Bank, the FDIC and the CommissionerBank Supervisory Authorities identified certain items of concern. In April 2010, the Bank entered into a memorandum of understanding, or MOU, with the FDIC andBank Supervisory Authorities. In March 2012, the Commissioner. The Bank MOU generallyentered into a Stipulation to the Issuance of a Consent Order agreeing to the issuance of the Consent Order. Although the Bank neither admitted nor denied any unsafe or unsound banking practices or violations of law or regulation, it agreed to the Consent Order, which requires that the Bank:Bank or the Bank Board to undertake a number of actions:

 

establish specific procedures designed to fully informincrease Board participation in the Bank’s Board of Directors regarding the management, operation, and financial conditionaffairs of the Bank, at regular intervals and in a consistent format;

including meetings to be held no less frequently than monthly;

 

develop specific plans and proposals forestablish a Board committee to oversee the reduction and improvement of lines of credit which are subject to adverse classification;

Bank’s compliance with the Consent Order;

 

correct identified violationsestablish a Board committee to review and approve loans of laws, rules$1 million, or more;

have and regulations,retain qualified management;

obtain approval prior to the appointment of a new member to the Board or the employment of a new senior executive officer;

develop and adopt appropriate proceduresapprove a management plan;

maintain a tier 1 leverage capital ratio of not less than 8.0%, a total risk-based capital ratio of not less than 11.0%, and a fully funded allowance for loan and lease losses;

submit a written capital plan to ensurethe Bank Supervisory Authorities;

present to the Bank Supervisory Authorities, and implement, a plan to increase the Bank’s future compliancetier 1 capital or to take other measures to improve the capital ratios to the percentages required by the Consent Order;

reduce those assets classified “doubtful” and “substandard” in accordance with all applicable laws, rulesa written plan to be submitted to, and regulations;

approved by, the Bank Supervisory Authorities;

 

eliminate, by collection, charge-off, or other proper entry, all assets or portions of assets classified “loss” that have not been previously collected or charged-off, and 50% of assets classified “doubtful”;

prepare

perform, and submit to the Bank Supervisory Authorities, comprehensive annual budget and earnings forecasts;

a risk segmentation analysis;

 

review its overall liquidity objectivesdevelop and develop plans and procedures aimed at reducing reliance on volatile liabilitiesimplement a plan to fund longer term assets;

reduce concentrations of credit;

 

maintaindevelop and implement a Tier I Leverage Capital ratio of not less than 8.0%written plan for systematically reducing and a Total Risk-Based Capital ratio of not less than 12.0%. In the event that the Tier I Leverage Capital ratio falls below 8.0% or the Total Risk-Based Capital ratio falls below 12.0%, the Bank must notify the Bank Supervisory Authorities and increasemonitoring the Bank’s capital in an amount sufficient to meet the ratios required by the Bank Supervisory Authorities;

commercial real estate (“CRE”) loans concentration of credit;

 

enhance its loan loss reserve policy to incorporate recommendations of the Bank Supervisory Authorities;

establish and continue to maintain an adequate reserve for loan losses;

not pay any cash dividends without the prior written consent of the Bank Supervisory Authorities;

annually review, formulaterevise, adopt, and submit to the Bank Supervisory Authorities a written lending and collection policy;

notify the Bank Supervisory Authorities at least 60 days prior to undertaking asset growth that exceeds 10% or more per annum or initiating material changes in asset or liability composition;

review and revise, as necessary, the Bank’s objectives relative to asset growth, which objectives shall include consideration ofwritten policy and procedures for managing interest rate risk;

at least quarterly, analyze and measure the Bank’s credit concentrations, capital levels,level of interest rate risk exposure, and liquidity positions;maintain exposure within the limits set forth in the interest rate risk policy;

Comply with theJoint Agency Policy Statement on Interest Rate Risk, FIL-52-1996 (June 26, 1996), andFinancial Institution Management of Interest Rate Risk, FIL-2-2010 (Jan. 20, 2010);

not extend any additional credit to borrowersany borrower who have loanshas a loan or other extension of credit from the Bank that havehas been (i) charged off by the Bank or classified, as Lossin whole or Doubtful, so long as such loans remainin part, “loss” or “doubtful” and is uncollected, or (ii) classified, in whole or part, “substandard,” except with the prior approval of the Bank Supervisory Authorities;

make no additional advances to any borrower whose loan or line of credit has been adversely classified Substandard, without the prior approval of a majority of the Board;

Board under certain limited circumstances;

 

revisereview the adequacy of the allowance for loan reviewlosses and establish a comprehensive policy for determining the adequacy of the allowance for loan losses;

submit to incorporate recommendationsthe Bank Supervisory Authorities, and thereafter approve, an acceptable written business/strategic plan to include objectives for the Bank’s earnings performance, growth, balance sheet mix, liability structure, capital adequacy, and reduction of nonperforming and underperforming assets, together with strategies for achieving those objectives;

not declare or pay dividends, bonuses, or make any other form of payment outside the ordinary course of business resulting in a reduction of capital, without the prior written approval of the Bank Supervisory Authorities;

correctnot make any distributions of interest, principal or other sums on subordinated debentures, without the Bank’s internal audit program; and

amend policies for interest rate risk management to incorporate earnings parameters as recommended byprior written approval of the Bank Supervisory Authorities.

Authorities;

In addition,

eliminate and/or correct all reported violations of laws, regulations, and/or contraventions of statements of policy, and adopt and implement appropriate procedures to ensure future compliance;

not accept, renew, or rollover any brokered deposits, without the prior approval of the FDIC;

annually prepare and implement a written plan and a comprehensive budget acceptable to the Bank Supervisory Authorities; and

make quarterly progress reports.

Because of the Bank does not satisfy one of the elevated capital requirements, the Bank may not accept, renew, or roll over brokered deposits, and is subject to restrictions on the rate of interest it may pay on deposits. Also, as a consequence of the Consent Order, the Bank is deemed to be in a “troubled condition,” as defined under the FDIC’s rules and regulations, which further prohibits or limits certain golden parachute agreements and payments to management.

Written Agreement

As a direct consequence of the issuance of the MOU and the requirement Bancorp serve as a source of strength for the Bank, in June 2010, Bancorp entered into an MOU with the FRB. TheFollowing the Consent Order, Bancorp MOU generallyentered into the Written Agreement with the FRB, effective July 20, 2012. Although Bancorp neither admitted nor denied any unsafe or unsound banking practices or violations of law or regulation, it agreed to the Written Agreement, which requires that Bancorp:Bancorp, its Board of Directors or the Bank to undertake a number of actions:

 

take appropriate steps to fully utilize Bancorp’s financial and managerial resources, to serve as a source of strength to the Bank;

not declare or pay any dividends including payments for trust preferred securities, without the prior written approval of the FRB;

FRB approval;

 

not directly or indirectly take dividends or any other form of payment representing a reduction in capital from the Bank without the prior written approval of the FRB;

FRB approval;

 

not make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities without prior FRB approval;

submit a written capital plan that is acceptable to the FRB, implement the approved plan, and thereafter fully comply with it;

not directly or indirectly, incur, increase, or guarantee any debt without FRB approval;

not directly or indirectly, purchase or redeem any shares of Bancorp’s stock without FRB approval;

submit annual cash flow projections;

comply with the prior written approvalnotice provisions of the FRB;

Federal Deposit Insurance Act and Regulation Y of the Federal Reserve related to changes in directors and senior executive officers, and related compensation and indemnification matters; and

 

submit quarterly progress reports.

preserve its cash assets and not dissipate those assets except for the benefitThe foregoing descriptions are summaries of the Bank;material terms of the Regulatory Agreements, and

take appropriate steps are qualified in their entirety by reference to ensure that the Bank complies with any order, or other supervisory action entered intoRegulatory Agreements. Copies of the Regulatory Agreements have been filed with the Bank Supervisory Authorities.SEC and are available on the SEC’s Internet website at www.sec.gov.

We have taken and continue to take prompt and aggressive action to respond to the issues raised in the Memoranda,Regulatory Agreements, including submitting quarterly reports to our banking regulators. Except for one of the elevated capital requirements, which we anticipate we will satisfy once the conversion is completed, we believe that we are generally in compliance with the Memoranda.Regulatory Agreements. However, the MemorandaRegulatory Agreements will each remain in effect until modified, terminated, lifted, suspended or set aside by the applicable banking regulators, and no assurance can be given as to the time that either of the MemorandaRegulatory Agreements will be terminated. We will seek to demonstrate as soon as possible to our banking regulators that we have fully complied with the requirements of the MemorandaRegulatory Agreements and that they should be terminated. However, we expect that the MemorandaRegulatory Agreements will remain in effect for the immediate future.

Holding Company Regulation

General.As a bank holding company following the conversion, Macon FinancialEntegra will be subject to the Bank Holding Company Act of 1956 (the “BHCA”), and subject to certain regulations of the Federal Reserve. Under the BHCA, a bank holding company such as Macon Financial,Entegra, which does not qualify as a financial holding company, is prohibited from engaging in activities other than banking, managing or controlling banks or other permissible subsidiaries, furnishing services to or performing services for its subsidiaries or engaging in any other activity that the Federal Reserve determines to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

The BHCA will also prohibit Macon FinancialEntegra from acquiring direct or indirect control of more than 5% of the outstanding voting stock or substantially all of the assets of any bank or savings bank, or merging or consolidating with another bank holding company without prior approval of the Federal Reserve. Additionally, the BHCA will prohibit Macon FinancialEntegra from engaging in, or acquiring ownership or control of more than 5% of the outstanding voting stock of any company engaged in, a non-banking business unless such business is determined by the Federal Reserve to be so closely related to banking as to be properly incident thereto. The BHCA does not place territorial restrictions on the activities of such non-banking related activities.

State and federal law restricts the amount of voting stock of a savings bank or bank holding company that a person may acquire without prior regulatory approval. Pursuant to North Carolina law, no person may directly or indirectly purchase or acquire voting stock of any savings bank or bank holding company which would result in the change in control of that savings bank or bank holding company unless the Commissioner approves the proposed acquisition. Under North Carolina law, a person will be deemed to have acquired “control” of a savings bank or bank holding company if the person directly or indirectly (1)(i) owns, controls or has power to vote

10% or more of the voting stock of the savings bank or bank holding company, or (2)(ii) otherwise possesses the power to direct or cause the direction of the management and policy of the savings bank or bank holding company.

Federal law imposes additional restrictions on acquisitions of stock of banks and bank holding companies. Under the BHCA, and the Change in Bank Control Act of 1978 (the “CBCA”), as amended, and regulations adopted thereunder and under the BHCA, a person or group acting in concert must give advance notice to the applicable banking regulator before directly or indirectly acquiring “control” of a federally-insured bank or bank holding company. Under applicable federal law, control is conclusively deemed to have been acquired upon the acquisition of 25% or more of any class of voting securities of any federally-insured bank or bank holding company. Both the BHCA and CBCA generally create a rebuttable presumption of a change in control if a person or group acquires ownership or control of or the power to vote 10% or more of any class of a bank or bank holding company’s voting securities, and either (1)(i) the bank or bank holding company has a class of outstanding securities that are subject to registration under the Securities Exchange Act, of 1934, as amended (the “Exchange Act”), or (2)(ii) no other person will own, control, or have the power to vote a greater percentage of that class of voting securities immediately after the transaction. This presumption can, in certain cases, be rebutted by entering into “passivity commitments” with the Federal Reserve or FDIC, as applicable. Upon receipt of a notice of a change in control, the FDIC or the Federal Reserve, as applicable, may approve or disapprove the acquisition.

Prior approval of the Federal Reserve and the Commissioner would be required for any acquisition of control of either Macon FinancialEntegra or the Bank by any bank holding company under the BHCA and the North Carolina Bank Holding Company Act (“NCBHCA”), respectively. Control for purposes of the BHCA and the NCBHCA would be based on whether the holding company (1)(i) owns, controls or has power to vote 25% or more of our voting stock or the voting stock of the Bank, (2)(ii) controls the election of a majority of our Board of Directors or the Bank Board, or (3)(iii) the Federal Reserve or the Commissioner, as applicable, determines that the holding company directly or indirectly exercises a controlling influence over our management or policies or the management or policies of the Bank. As part of such acquisition, the holding company (unless already so registered) would be required to register as a bank holding company under the BHCA and the NCBHCA.

There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by law and regulatory policy that are designed to minimize potential loss to the depositors of such depository institutions and the FDIC’s deposit insurance fund in the event the depository institution becomes in danger of default or is in default. For example, to avoid receivership of an insured depository institution subsidiary, a bank holding company is required to guarantee the compliance of any insured depository institution subsidiary that has become “undercapitalized” with the terms of any capital restoration plan filed by such subsidiary with its appropriate federal banking agency up to the lesser of (1)(i) an amount equal to 5% of the institution’s total assets at the time the institution became undercapitalized, or (2)(ii) the amount which is necessary to bring the institution into compliance with all acceptable capital standards as of the time the institution initially fails to comply with such capital restoration plan. Under a policy of the Federal Reserve with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so absent such policy. The Federal Reserve under the BHCA also has the authority to require a bank holding company to terminate any activity or to relinquish control of a

nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve’s determination that such activity or control constitutes a serious risk to the financial soundness and stability of any bank subsidiary of the bank holding company.

In addition, the “cross-guarantee” provisions of the Federal Deposit Insurance Act, as amended, require insured depository institutions under common control to reimburse the FDIC for any loss suffered as a result of the default of a commonly controlled insured depository institution or for any assistance provided by the FDIC to a commonly controlled insured depository institution in danger of default. The FDIC may decline to enforce the cross-guarantee provisions if it determines that a waiver is in the best interest of the FDIC’s deposit insurance fund. The FDIC’s claim for damages is superior to claims of shareholders of the insured depository institution or any affiliate but is subordinate to claims of depositors, secured creditors and holders of subordinated debt (other than affiliates) of the commonly controlled insured depository institutions.

As a result of Macon Financial’sEntegra’s ownership of the Bank following the conversion, Macon FinancialEntegra will register under the bank holding company laws of North Carolina. Accordingly, Macon FinancialEntegra will also become subject to regulation and supervision by the Commissioner.

Capital Adequacy Guidelines for Holding Companies. The Federal Reserve has adopted capital adequacy guidelines for bank holding companies and banks that are members of the Federal Reserve System and have consolidated assets of $500 million or more. Bank holding companies subject to the Federal Reserve’s capital adequacy guidelines are required to comply with the Federal Reserve’s risk-based capital guidelines. Under these regulations, the minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) is 8%8.0%. At least half of the total capital is required to be “Tier I Capital,“tier 1 capital,” principally consisting of common shareholders’ equity, non-

cumulativenon-cumulative perpetual preferred stock, a limited amount of cumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less goodwill and certain other intangible assets. The remainder (“Tier II Capital”tier 2 capital”) may consist of a limited amount of subordinated debt, certain hybrid capital instruments and other debt securities, perpetual preferred stock, and a limited amount of the general loan loss allowance.

In addition to the risk-based capital guidelines, the Federal Reserve has adopted a minimum Tier I Capitaltier 1 capital (leverage) ratio, under which a bank holding company must maintain a minimum level of Tier I Capitaltier 1 capital to average total consolidated assets of at least 3% in the case of a bank holding company which has the highest regulatory examination rating and is not contemplating significant growth or expansion. All other bank holding companies are expected to maintain a Tier I Capitaltier 1 capital (leverage) ratio of at least 4%.

Bancorp exceeded all applicable minimum capital adequacy guidelines as of December 31, 20102013.

In July 2013, the Federal Reserve approved a new rule that implements the “Basel III” regulatory capital reforms and March 31, 2011.changes required by the Dodd-Frank Act. The final rule includes new risk-based capital and leverage ratios, which are effective January 1, 2015, and revise the definition of what constitutes “capital” for purposes of calculating those ratios. See “– Net Worth and Capital Adequacy Requirements Applicable to the Bank.”

Dividend and Repurchase Limitations. FollowingThe Federal Reserve has the power to prohibit dividends by bank holding companies if their actions constitute unsafe or unsound practices. The Federal Reserve has issued a

policy statement on the payment of cash dividends by bank holding companies, and which expresses the Federal Reserve’s view that a holding company should pay cash dividends only to the extent that the company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the company’s capital needs, asset quality and overall financial condition. The Federal Reserve also indicated that it would be inappropriate for a holding company experiencing serious financial problems to borrow funds to pay dividends. Under the prompt corrective action regulations, the Federal Reserve may prohibit a bank holding company from paying any dividends if the holding company’s bank subsidiary is classified as “undercapitalized.”

Federal Reserve policy also provides that a holding company should inform the Federal Reserve supervisory staff prior to redeeming or repurchasing common stock or perpetual preferred stock if the holding company is experiencing financial weaknesses or if the repurchase or redemption would result in a net reduction, as of the end of a quarter, in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred.

Pursuant to Federal Reserve regulations, Entegra may not make a distribution that would constitute a return of capital during the three years following the completion of the conversion Macon Financial must obtainand offering.

Under Federal Reserve approval in order to use more than 10%regulations, for a period of one year from the date of the completion of the offering Entegra may not repurchase any of its net worthcommon stock from any person, except (i) in an offer made to makeall shareholders to repurchase the common stock on a pro rata basis, approved by the Federal Reserve, (ii) the repurchase of qualifying shares of a director, or (iii) repurchases to fund restricted stock plans or tax-qualified employee stock benefit plans. Where extraordinary circumstances exist, the Federal Reserve may approve the open market repurchase of up to 5% of Entegra’s common stock during any 12-month period unless it (1) both beforethe first year following the conversion and afteroffering. To receive such approval, Entegra must establish compelling and valid business purposes for the redemption satisfies capital requirements for “well capitalized” state member banks; (2) received a one or two rating in its last examination; and (3) is notrepurchase to the subjectsatisfaction of any unresolved supervisory issues. Macon Financial’sthe Federal Reserve.

Entegra’s ability to pay dividends or repurchase shares may also be dependent upon its receipt of dividends from the Bank. Macon Financial’sEntegra’s payment of dividends and repurchase of stock will also be subject to the requirements and limitations of North Carolina corporate law and the terms of the Bancorp MOU,Written Agreement, which is discussed in the section entitled “– Memoranda of Understanding”“Supervision and Regulation – Regulatory Agreements” on page.

Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).In July, 2010, President Obama signed into law the Dodd-Frank Act, which was intended primarily to overhaul the financial regulatory framework following the global financial crisis and will impact all financial institutions including Macon Financial and the Bank. The Dodd-Frank Act contains provisionssignificantly changed bank regulation and has affected the lending, investment, trading and operating activities of depository institutions and their holding companies.

The Dodd-Frank Act also created a new Consumer Financial Protection Bureau with extensive powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau also has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets, such as the Bank, will continue to be examined by their applicable federal bank regulators. The Dodd-Frank Act also gave state attorneys general the ability to enforce applicable federal consumer protection laws.

The Dodd-Frank Act broadened the base for FDIC assessments for deposit insurance, permanently increased the maximum amount of deposit insurance to $250,000 per depositor. The legislation also, among other things, expandrequires originators of certain securitized loans to retain a portion of the credit risk, stipulates regulatory oversightrate-setting for certain debit card interchange fees, repealed restrictions on the payment of interest on commercial demand deposits and supervisioncontains a number of reforms related to mortgage and other consumer lending, establish a Bureau of Consumer Financial Protection and increase the possible liabilities of financial institutions violating consumer financial laws, modify the methodology for calculating the deposit insurance assessments of banks, impose increased corporate governance and executive compensation requirements on banks and bank holding companies and significantly increase the data collection and reporting obligations of financial institutions generally.originations. The Dodd-Frank Act requires various federal agenciesincreased the ability of shareholders to adoptinfluence boards of directors by requiring companies to give shareholders a broad rangenon-binding vote on executive compensation and so-called “golden parachute” payments. However, as an “emerging growth company” under the JOBS Act, we are exempt from the shareholder vote requirement until one year after we cease to be an “emerging growth company.” The legislation also directed the Federal Reserve to promulgate rules prohibiting excessive compensation paid to company executives, regardless of new implementing rules and regulations and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in draftingwhether the implementing rules and regulations.company is publicly traded or not. Many of these required regulations have been released for comment only, with adoption not yet scheduled, or have not yet been made publicly available for comment. Consequently, many of the details and much of the impactprovisions of the Dodd-Frank Act are not yet known.subject to delayed effective dates or require the implementing regulations and, therefore, their impact on our operations cannot be fully determined at this time. However, it is likely that the Dodd-Frank Act will increase the regulatory burden, compliance costs and interest expense for the Bank and Entegra.

Gramm-Leach-Bliley Act.The federal Gramm-Leach-Bliley Act, enacted in 1999 (the “GLB Act”), dramatically changed various federal laws governing the banking, securities and insurance industries. The GLB Act expanded opportunities for banks and bank holding companies to provide services and engage in other revenue-generating activities that previously were prohibited to them. In doing so, it increased competition in the financial services industry, presenting greater opportunities for our larger competitors who were more able to expand their service and products than smaller, community-oriented financial institutions.

USA Patriot Act of 2001.The USA Patriot Act of 2001 was enacted in response to the terrorist attacks that occurred in New York, Pennsylvania and Washington, D.C. on September 11, 2001. The Act was intended to strengthen the ability of U.S. law enforcement and the intelligence community to work cohesively to combat terrorism on a variety of fronts. The impact of the Act on financial institutions of all kinds has been significant and wide ranging. The Act contains sweeping anti-money laundering and financial transparency laws and requires various regulations, including standards for verifying customer identification at account opening, and rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.

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, our Chief Executive Officer and Chief Financial Officer will be required to certify that our 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 our internal control over financial reporting; they have made certain disclosures to our auditors and the audit committee of our Board of Directors about our internal control over

financial reporting; and they have included information in our quarterly and annual reports about their evaluation and whether there have been changes in our internal control over financial reporting or in other factors that could materially affect internal control over financial reporting. Macon FinancialEntegra will be subject to further reporting and audit requirements under the requirements of the Sarbanes-Oxley Act. Macon FinancialEntegra will prepare policies, procedures and systems designed to ensure compliance with these regulations.

Federal Securities Laws.Macon Financial Entegra has filed with the SEC a registration statement under the Securities Act of 1933, as amended (the “Securities Act”), for the registration of the shares of common stock to be issued pursuant to the offering. Upon completion of the offering, the common stock will be registered with the SEC under the Exchange Act. Macon FinancialEntegra will be subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act.

The registration under the Securities Act of shares of common stock to be issued in the offering does not cover the resale of those shares. Shares of common stock purchased by persons who are not Macon Financial’sEntegra’s affiliates may be resold without registration. Shares purchased by Macon Financial’sEntegra’s affiliates will be subject to the resale restrictions of Rule 144 under the Securities Act. If Macon FinancialEntegra meets the current public information requirements of Rule 144 under the Securities Act, each affiliate 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 our outstanding shares, or the average weekly volume of trading in the shares during the preceding four calendar weeks. In the future, Macon FinancialEntegra may permit affiliates to have their shares registered for sale under the Securities Act.

Emerging Growth Company Status.On April 5, 2012, the JOBS Act was signed into law. The JOBS Act made numerous changes to the federal securities laws to facilitate access to capital markets. Under the JOBS Act, a company with total annual gross revenues of less than $1.0 billion during its most recently completed fiscal year qualifies as an “emerging growth company.” We qualify as an “emerging growth company” and believe that we will continue to qualify as an “emerging growth company” for five years from the completion of the stock offering.

As an “emerging growth company,” we have elected to use the transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards. As of December 31, 2013, there is not a significant difference in the presentation of our financial statements as compared to other public companies as a result of this transition guidance.

Additionally, we are in the process of evaluating the benefits of relying on the reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, if, as an “emerging growth company”, we choose to rely on such exemptions we may not be required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies

under the Dodd-Frank Act, (iii) hold non-binding shareholder votes regarding annual executive compensation or executive compensation payable in connection with a merger or similar corporate transaction, (iv) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis), and (v) disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation. These exemptions will apply for a period of five years following the completion of our initial public offering or until we are no longer an “emerging growth company,” whichever is earlier. However, we will not be subject to the auditor attestation requirement or additional executive compensation disclosure so long as we remain a “smaller reporting company” under Securities and Exchange Commission regulations (generally less than $75 million of voting and non-voting equity held by non-affiliates).

We could remain an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues exceed $1.0 billion, (ii) the date that we become a “large accelerated filer” as defined inRule 12b-2 under the Exchange Act, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1.0 billion in non-convertible debt during the preceding three-year period.

Bank Regulation

General. The Bank is an insured North Carolina chartered savings bank that is a member of the FHLB System. Its deposits are insured through the FDIC’s deposit insurance fund, and it is subject to supervision and examination by and the regulations and reporting requirements of the FDIC and the Commissioner,Bank Supervisory Authorities, which are, respectively, its primary federal and state banking regulators.

Subject to limitations established by the Commissioner, North Carolina chartered savings banks may make any loan or investment or engage in any activity that is permitted to federally-chartered institutions. In addition to such lending authority, North Carolina chartered savings banks are authorized to invest funds, in excess of loan demand, in certain statutorily permitted investments, including but not limited to (1)(i) obligations of the U.S. Government, or those guaranteed by it; (2)(ii) obligations of the State of North Carolina; (3)(iii) bank demand or time deposits; (4)(iv) stock or obligations of the FDIC’s deposit insurance fund or a FHLB; (5)(v) savings accounts of any savings institution as approved by the Bank Board; and (6)(vi) stock or obligations of any agency of the State of North Carolina or of the U.S. Government or of any corporation doing business in North Carolina whose principal business is to make education loans. However, a North Carolina chartered savings bank cannot invest more than 15% of its total assets in business, commercial, corporate and agricultural loans, and cannot directly or indirectly acquire or retain any corporate debt security that is not of investment grade (generally referred to as “junk bonds”).

As a federally insured depository institution, the Bank is prohibited from engaging as principal in any activity, or acquiring or retaining any equity investment of a type or in an amount, that is not permitted for national banks unless (1)(i) the FDIC determines that the activity or investment would pose no significant risk to the deposit insurance fund, and (2)(ii) the Bank is, and continues to be, in compliance with all applicable capital standards.

In addition, the Bank is subject to various regulations promulgated by the Federal Reserve including, without limitation, Regulation B (Equal Credit Opportunity), Regulation D (Reserves), Regulation E (Electronic Fund Transfers), Regulation O (Loans to Executive Officers, Directors and Principal Shareholders), Regulation W (Transactions Between Member Banks and Affiliates), Regulation Z (Truth in Lending), Regulation CC (Availability of Funds) and Regulation DD (Truth in Savings).

The FDIC and the CommissionerBank Supervisory Authorities have broad powers to enforce laws and regulations applicable to the Bank. Among others, these powers include the ability to assess civil money penalties, to issue cease and desist or removal orders, and to initiate injunctive actions. In general, these enforcement actions may be initiated in response to violations of laws and regulations and the conduct of unsafe and unsound practices.

Transactions with Affiliates. Under current federal law, depository institutions are subject to the restrictions contained in Section 22(h) of the Federal Reserve Act with respect to loans to directors, executive officers and principal

shareholders. Under Section 22(h), loans to directors, executive officers and shareholders who own more than 10% of a depository institution (18% in the case of institutions located in an area with less than 30,000 in population), and certain affiliated entities of any of the foregoing, may not exceed, together with all other outstanding loans to such person and affiliated entities, the institution’s loans-to-one-borrower limit (as discussed below). Section 22(h) also prohibits loans above amounts prescribed by the appropriate federal banking agency to directors, executive officers and shareholders who own more than 10% of an institution, and their respective affiliates, unless such loans are approved in advance by a majority of the board of directors of the institution. Any “interested” director may not participate in the voting. The FDIC has prescribed the loan amount (which includes all other outstanding loans to such person), as to which such prior board of directors of director approval is required, as being the greater of $25,000 or 5% of capital and surplus (up to $500,000). Further, pursuant to Section 22(h), the Federal Reserve requires that loans to directors, executive officers, and principal shareholders be made on terms substantially the same as offered in comparable transactions with non-executive employees of the Bank. The FDIC has imposed additional limits on the amount a bank can loan to an executive officer.

Deposit Insurance. The deposit accounts of the Bank are insured by the FDIC’s deposit insurance fund. The Dodd-Frank Act permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2008. The Dodd-Frank Act also provides unlimited deposit insurance for noninterest bearing transaction accounts through December 31, 2013.depositor.

The FDIC issues regulations and conducts periodic examinations, requires the filing of reports and generally supervises the operations of its insured banks. This supervision and regulation is intended primarily for the protection of depositors. Any insured bank that is not operated in accordance with or does not conform to FDIC regulations, policies and directives may be sanctioned for noncompliance. Civil and criminal proceedings may be instituted against any insured bank or any director, officer or employee of such bank for the violation of applicable laws and regulations, breaches of fiduciary duties or engaging in any unsafe or unsound practice. The FDIC has the authority to terminate insurance of accounts pursuant to procedures established for that purpose.

The Bank is subject to insurance assessments imposed by the FDIC. The FDIC imposes a risk-based deposit premium assessment system, which was amended pursuant to the Federal Deposit Insurance Reform Act of 2005. Under this system, as amended, the assessment rates for an insured depository institution vary according to the level of risk incurred in its activities. To arrive at an assessment rate for a banking institution, the FDIC places it in one of four risk categories determined by reference to its capital levels and supervisory ratings. In addition, in the case of those institutions in the lowest risk category, the FDIC further determines its assessment rate based on certain specified financial ratios or, if applicable, its long-term debt ratings.

In 2009,The Dodd-Frank Act required the FDIC actively sought to replenish the deposit insurance fund.revise its procedures to base its assessments upon each insured institution’s total assets less tangible equity instead of deposits. The FDIC increased risk-basedfinalized a rule, effective April 1, 2011, that set the assessment rates uniformly by sevenrange at 2.5 to 45 basis points on an annual basis, beginning in the first quarter of 2009. On May 22, 2009, the FDIC adopted a final rule imposing a five basis point special assessment on each insured depository institution’s qualifyingtotal assets less Tier I Capital as of June 30, 2009. The FDIC collected this special assessment on September 30, 2009. On November 12, 2009, the FDIC adopted a final rule that required insured financial institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for the following three years. Such prepaid assessments were collected on December 30, 2009 at a rate based on the insured institution’s modified third quarter 2009 assessment rate. The Bank’s prepaid assessment was $4.5 million.tangible equity.

Under the Dodd-Frank Act, the FDIC is required to increase the minimum designated reserve ratio of the deposit insurance fund from 1.15% to 1.35% of estimated insured deposits by 2020, with financial institutions of more than $10 billion in assets being assessed a greater portion of the necessary funds required to achieve the 1.35% reserve ratio than smaller institutions.

Community Reinvestment. Under the Community Reinvestment Act (“CRA”), as implemented by regulations of the FDIC, an insured institution has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution’s discretion to develop, consistent with the CRA, the types of products and services that it believes are best suited to its particular community. The CRA requires the federal banking regulators, in connection with their examinations of insured institutions, to assess the institutions’ records of meeting the credit needs of their communities, using the ratings “outstanding,” “satisfactory,” “needs to improve,” or “substantial noncompliance,” and to take that record into account in its evaluation of certain applications by those institutions. All institutions are required to make public disclosure of their CRA performance ratings. The Bank received a “satisfactory” rating in its last CRA examination, which was completed during October, 2010.

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. Interagency guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to implement an acceptable compliance plan. Failure to implement such a plan can result in further enforcement action, including the issuance of a cease and desist order or the imposition of civil money penalties.

Net Worth and Capital Adequacy Requirements Applicable to the Bank. The Bank is required to comply with the capital adequacy standards established by state and federal laws and regulations. The Commissioner requires that savings banks maintain net worth not less than 5% of its total assets. Intangible assets must be deducted from net worth and assets when computing compliance with this requirement. The Bank complied with the net worth requirements as of MarchDecember 31, 2011.2013. As discussed below, as of MarchDecember 31, 2011,2013, the Bank did not comply with one of the elevated capital requirements established by the Bank MOU.Consent Order.

In addition, the FDIC has promulgated risk-based capital and leverage capital guidelines for determining the adequacy of a bank’s capital, and all applicable capital standards must be satisfied for the Bank to be considered in compliance with the FDIC’s requirements. Under the FDIC’s risk-based capital measure, the minimum ratio (Total Risk-Based Capital(total risk-based capital ratio) of a bank’s total capital to its risk-weighted assets (including certain off-balance-sheet items, such as standby letters of credit) is 8.0%. At least half of total capital must be composed of common equity, undivided profits, minority interests in the equity accounts of consolidated subsidiaries, qualifying non-cumulative perpetual preferred stock, a limited amount of cumulative perpetual preferred stock, less goodwill and certain other intangible assets (Tier I Capital)(tier 1 capital). The remainder may consist of certain subordinated debt, certain hybrid capital instruments and other qualifying preferred stock, a limited amount of loan loss reserves, and net unrealized holding gains on equity securities (Tier II Capital)(tier 2 capital). At MarchDecember 31, 2011,2013, the Bank’s Total Risk-Based Capitaltotal risk-based capital ratio and Tier I Risk-Based Capitaltier 1 risk-based capital ratio were 11.55%11.97% and 10.28%10.70%, respectively, which were welleach above the FDIC’s minimum risk-based capital guidelines.

Under the FDIC’s leverage capital measure, the minimum ratio (the Tier I Leverage Capital ratio)“tier 1 leverage capital ratio”) of Tier I Capitaltier 1 capital to total assets is 3.0% for banks that meet certain specified criteria, including having the highest regulatory rating. All other banks generally are required to maintain an additional cushion of 100 to 200 basis points above the stated minimum. The FDIC’s guidelines also provide that banks experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum levels without significant reliance on intangible assets, and the FDIC has indicated that it will consider a bank’s “Tangible Leverage Ratio”“tangible leverage ratio” (deducting all intangible assets) and other indicia of capital strength in evaluating proposals for expansion or new activities. At MarchDecember 31, 2011,2013, the Bank’s Tier I Leverage Capitaltier 1 leverage capital ratio was 7.07%7.02%, which was well above the FDIC’s minimum leverage capital guidelines.

Failure to meet the FDIC’s capital guidelines could subject a bank to a variety of enforcement remedies, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on the taking of brokered deposits, and certain other restrictions on its business. As described below, substantial additional restrictions can be imposed upon FDIC-insured depository institutions that fail to meet applicable capital requirements. See “– Prompt Corrective Action” on page. The FDIC also considers interest rate risk (arising when the interest rate sensitivity of an institution’s assets does not match the sensitivity of its liabilities or its off-balance-sheet position) in the evaluation of a bank’s capital adequacy.

Pursuant to the Bank MOU,Consent Order, the Bank is required to maintain heightened capital levels. Specifically, the Bank MOUConsent Order requires that the Bank maintain a Tier I Leverage Capitaltier 1 leverage capital ratio of not less than 8.0%, and a Total Risk-Based Capitaltotal risk-based capital ratio of not less than 12%11.0%. As of MarchDecember 31, 2011,2013, the Bank did not satisfy one of these elevated capital requirements.

In July 2013, the Federal Reserve and the FDIC approved revisions to their capital adequacy guidelines and prompt corrective action rules that implement the revised standards of the Basel Committee on Banking Supervision, commonly called Basel III, and address relevant provisions of the Dodd-Frank Act. “Basel III” refers to two consultative documents released by the Basel Committee on Banking Supervision in December 2009, the rules text released in December 2010, and loss absorbency rules issued in January 2011, which include significant changes to bank capital, leverage and liquidity requirements.

The rules include new risk-based capital and leverage ratios, which are effective January 1, 2015, and revise the definition of what constitutes “capital” for purposes of calculating those ratios. The new minimum capital level requirements applicable to Entegra and the Bank will be: (i) a new common equity tier 1 capital ratio of 4.5%; (ii) a tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a tier 1 leverage ratio of 4% for all institutions. The rules eliminate the inclusion of certain instruments, such as trust preferred securities, from tier 1 capital. Instruments issued prior to May 19, 2010 will be grandfathered for companies with consolidated assets of $15 billion or less. The rules also establish a “capital conservation buffer” of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity tier 1 capital and would result in the following minimum ratios: (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%. The new capital conservation buffer requirement will be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase by that amount each year until fully implemented in January 2019. An institution would be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations would establish a maximum percentage of eligible retained income that could be utilized for such actions.

Loans-To-One-Borrower. The Bank is subject to the Commissioner’s loans-to-one-borrower limits on savings banks. Under these limits, no loans and extensions of credit to any borrower outstanding at one time and not fully secured by readily marketable collateral shall exceed 15% of the net worth of the savings bank. Loans and extensions of credit fully secured by readily marketable collateral may not exceed 10% of the net worth of the savings bank. This second limitation is separate from, and in addition to, the first limitation. These limits also authorize savings banks to make loans-to-one-borrower, for any purpose, in an amount not to exceed $500,000. A savings bank also is authorized to make loans-to-one-borrower to develop domestic residential housing units, not to exceed the lesser of $30 million or 30% of the savings bank’s net worth, provided that the purchase price of each single-family dwelling in the development does not exceed $500,000 and

the aggregate amount of loans made pursuant to this authority does not exceed 150% of the savings bank’s net worth. These limits also authorize a savings bank to make loans-to-one-borrower to finance the sale of real property acquired in satisfaction of debts in an amount up to 50% of the savings bank’s net worth.

As of MarchDecember 31, 2011,2013, our legal loans-to-one borrower limit was $13.7$10.4 million. The largest aggregate amount of loans that the Bank had to any one borrower was $14.3$9.8 million. At the time these loans were made, the aggregate amount outstanding was below the legal lending limit.

Limits on Rates Paid on Deposits and Brokered Deposits. Regulations enacted by the FDIC place limitations on the ability of insured depository institutions to accept, renew or roll-over deposits by offering rates of interest which are significantly higher than the prevailing rates of interest on deposits offered by other insured depository institutions in the depository institution’s normal market area. Under these regulations, “well capitalized” depository institutions may accept, renew or roll-over such deposits without restriction, “adequately capitalized” depository institutions may accept, renew or roll-over such deposits with a waiver from the FDIC (subject to certain restrictions on payments of rates) and “undercapitalized” depository institutions

may not accept, renew, or roll-over such deposits. The regulations contemplate that the definitions of “well capitalized,” “adequately capitalized” and “undercapitalized” will be the same as the definitions adopted by the FDIC to implement the corrective action provisions discussed below. See “– Prompt Corrective Action” on page.Action,” below. As of MarchDecember 31, 2011,2013, the Bank wasexceeded all of the applicable regulatory capital ratios to be considered “well capitalized” under the regulatory framework for prompt corrective action, but did not satisfy one of the elevated capital ratios required by the Consent Order. Accordingly, the Bank is not considered “well capitalized,” and, thus, was not subject to thethese limitations on rates payable on its deposits.

FHLB System. The FHLB System provides a central credit facility for member institutions. As a member of the FHLB of Atlanta, the Bank is required to own capital stock in the FHLB of Atlanta in an amount at least equal to 0.20% of the Bank’s total assets at the end of each calendar year, plus 4.5% of its outstanding advances (borrowings) from the FHLB of Atlanta. At MarchDecember 31, 2011,2013, the Bank was in compliance with these requirements.

Reserve Requirements. Pursuant to regulations of the Federal Reserve, all insured depository institutions must maintain average daily reserves against their transaction accounts equal to specified percentages of the balances of such accounts. These percentages are subject to adjustment by the Federal Reserve. Because the Bank’s reserves are required to be maintained in the form of vault cash or in a noninterest-bearing account at a Federal Reserve bank, one effect of the reserve requirement is to reduce the amount of the Bank’s interest-earning assets. At MarchDecember 31, 2011,2013, the Bank met these reserve requirements.

Liquidity. The Bank is subject to the liquidity requirements established by the Commissioner. North Carolina law requires savings banks to maintain cash and readily marketable investments of not less thatthan 10% of the savings bank’s total assets. The computation of liquidity under North Carolina regulation allows the inclusion of mortgage-backed securities and investments that, in the judgment of the Commissioner, have a readily marketable value, including investments with maturities in excess of five years. On MarchDecember 31, 2011,2013, the Bank’s liquidity ratio, calculated in accordance with North Carolina regulations, was approximately 18.01%29.09%.

Prompt Corrective Action. Current federal law establishes a system of prompt corrective action to resolve the problems of undercapitalized institutions. Under this system, the FDIC has established five capital categories (“well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized”). The FDIC is required to take certain mandatory supervisory actions and is authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. The severity of any action taken will depend upon the capital category in which an institution is placed. Generally, subject to a narrow exception, current federal law requires the FDIC to appoint a receiver or conservator for an institution that is critically undercapitalized.

Under the FDIC’s rules implementing the prompt corrective action provisions, an insured, state-chartered savings bank that (1)(i) has a Total Risk-Based Capitaltotal risk-based capital ratio of 10.0% or greater, a Tier I Risk-Based Capitaltier 1 risk-based capital ratio of 6.0% or greater, and a Leverage Capitalleverage capital ratio of 5.0% or greater, and (2)(ii) is not subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the FDIC, is deemed to be “well capitalized.” A savings bank with a Total Risk-Based Capitaltotal risk-based capital ratio of 8.0% or greater, a Tier I Risk-Based Capitaltier 1 risk-based capital ratio of 4.0% or greater, and a Leverage Capitalleverage capital ratio of 4.0% or greater (or 3.0% or greater in the case of

an institution with the highest examination rating), is considered to be “adequately capitalized.” A savings bank that has a Total Risk-Based Capitaltotal risk-based capital ratio of less than 8.0%, a Tier I Risk-Based Capitaltier 1 risk-based capital ratio of less than 4.0%, or a Leverage Capitalleverage capital ratio of less than 4.0% (or 3.0% in the case of an institution with the highest examination rating), is considered to be “undercapitalized.” A savings bank that has a Total Risk-Based Capitaltotal risk-based capital ratio of less than 6.0%, a Tier I Risk-Based Capitaltier 1 risk-based capital ratio of less than 3.0%, or a Leverage Capitalleverage capital ratio of less than 3.0%, is considered to be “significantly undercapitalized,” and a savings bank that has a ratio of tangible equity capital to assets equal to or less than 2.0% is deemed to be “critically undercapitalized.” For purposes of these rules, the term “tangible equity”

includes core capital elements counted as Tier I Capitaltier 1 capital for purposes of the risk-based capital standards (see “– Net Worth and Capital Adequacy Requirements Applicable to the Bank” on page),         ), plus the amount of outstanding cumulative perpetual preferred stock (including related surplus), minus all intangible assets (with certain exceptions). A savings bank may be deemed to be in a capitalization category lower than indicated by its actual capital position if it receives an unsatisfactory examination rating.

A savings bank that is categorized as “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized,” is required to submit an acceptable capital restoration plan to the FDIC. An “undercapitalized” savings bank also is generally prohibited from increasing its average total assets, making acquisitions, establishing any branches, or engaging in any new line of business, except in accordance with an accepted capital restoration plan or with the approval of the FDIC. In addition, the FDIC is given authority with respect to any “undercapitalized” savings bank to take any of the actions it is required to or may take with respect to a “significantly undercapitalized” savings bank if it determines that those actions are necessary to carry out the purpose of the law.

NotwithstandingAs of December 31, 2013, the Bank MOU, at March 31, 2011,exceeded all of the applicable regulatory capital ratios to be considered “well capitalized” under the regulatory framework for prompt corrective action, but did not satisfy one of the elevated capital ratios required by the Consent Order. Accordingly, the Bank had the requisite capital levels to qualify asis not considered “well capitalized.”

Restrictions on Dividends and Other Capital Distributions. A North Carolina chartered stock savings bank may not declare or pay a cash dividend on, or repurchase any of, its capital stock if after making such distribution, the institution would become, or if it already is, “undercapitalized” (as such term is defined in the applicable law and regulations) or such transaction would reduce the net worth of the institution to an amount which is less than the minimum amount required by applicable federal and state regulations.

In addition, the Bank is not permitted to declare or pay a cash dividend or repurchase any of its capital stock if the effect thereof would be to cause its net worth to be reduced below the amount required for its liquidation account.

Under the terms of the Bank MOU,Consent Order, the Bank is currently restricted from paying dividends to Bancorp unless it receives advance approval from the FDIC and the Commissioner.Bank Supervisory Authorities. Additionally, the Bancorp MOUWritten Agreement provides that Bancorp must receive prior approval of the FRB before receiving dividends from the Bank.

Other Federal and North Carolina Regulations. The federal banking agencies, including the FDIC, have developed joint regulations requiring disclosure of contingent assets and liabilities and, to the extent feasible and practicable, supplemental disclosure of the estimated fair market value of assets and liabilities. Additional

joint regulations require annual examinations of all insured depository institutions by the appropriate federal banking agency, with some exceptions for small, well-capitalized institutions and state-chartered institutions examined by state regulators, and establish operational and managerial, asset quality, earnings and stock valuation standards for insured depository institutions, as well as compensation standards when such compensation would endanger the insured depository institution or would constitute an unsafe practice.

The grounds for appointment of a conservator or receiver for a North Carolina savings bank on the basis of an institution’s financial condition include: (1)(i) insolvency, in that the assets of the savings bank are less than its liabilities to depositors and others; (2)(ii) substantial dissipation of assets or earnings through violations of law or unsafe or unsound practices; (3)(iii) existence of an unsafe or unsound condition to transact business; (4)(iv) likelihood that the savings bank will be unable to meet the demands of its depositors or to pay its obligations in the normal course of business; and (5)(v) insufficient capital or the incurring or likely incurring of losses that will deplete substantially all of the institution’s capital with no reasonable prospect of replenishment of capital without federal assistance.

North Carolina law provides a procedure by which savings institutions may consolidate or merge, subject to approval of the Commissioner. The approval is conditioned upon findings by the Commissioner that, among other things, such merger or consolidation will promote the best interests of the members or shareholders of the merging institutions.

TAXATION

Federal Taxation

General.We 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 material federal income tax matters and is not a comprehensive description of the tax rules applicable to us.

Method of Accounting.For federal income tax purposes, Bancorp files a consolidated tax return with the Bank, and reports its income and expenses on the accrual method of accounting and uses a calendar year ending December 31 for filing its consolidated federal income tax returns.

Minimum Tax.The Internal Revenue Code of 1986, as amended (the “Code”) imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences, referred to as “alternative minimum taxable income.” The alternative minimum tax is payable to the extent alternative minimum taxable income is in excess of an exemption amount. Net operating losses can, in general, offset no more than 90% of alternative minimum taxable income. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. At MarchDecember 31, 2011,2013, Bancorp had noan alternative minimum tax credit carryforward.carryforward at approximately $0.1 million.

Net Operating Loss Carryovers.Generally, a financial institution may carry back net operating losses to the preceding two taxable years and carryforward to the succeeding 20 taxable years. However, as a result of recent legislation, subject to certain limitations, the carryback period for net operating losses incurred in 2008 or 2009 (but not both years) has been expanded to five years. At MarchDecember 31, 2011,2013, Bancorp had a $1.8$34.1 million net operating loss carryforward for federal income tax purposes and a $42.5 million net operating loss carryforward for North Carolina income tax purposes. See “–“Management Discussion and Analysis of Consolidated Financial Conditions and Results of Operations – Deferred Tax Assets” on page.

Corporate Dividends.Bancorp, and following the conversion, Macon Financial,Entegra, are able to exclude from their income 100% of the dividends received from the Bank as a member of the same affiliated group of corporations.

Audit of Tax Returns.Bancorp’s federal income tax returns have not been audited in the most recent five-year period.

State Taxation

The State of North Carolina imposes an income tax of approximately 6.9% on income measured substantially the same as federally taxable income, except that U.S. Government interest is not fully taxable. During the third quarter of 2013, North Carolina reduced its corporate income tax rate from 6.9% to 6.0% effective January 1, 2014, and to 5.0% effective January 1, 2015. Further reductions to 4.0% on January 1, 2016, and 3.0% on January 1, 2017, are contingent upon the State meeting revenue targets. Our state income tax returns have not been audited in the most recent five-year period. Under North Carolina law, we are also subject to an annual franchise tax at a rate of 0.15% of equity.

OUR MANAGEMENT

Management Structure

The Board of Directors of Macon FinancialEntegra consists of the same individuals who currently serve as directors of Bancorp and the Bank. The composition of our Board of Directors and the Bank’sBank Board will remain unchanged following the conversion. In addition, following the conversion each of the executive officers of Bancorp and the Bank will continue to serve as our executive officers.

Our Directors

We have nine directors. The directors of Macon FinancialEntegra are the same persons who currently serve as directors of Bancorp and the Bank. Each director will serve until the first annual meeting of shareholders of Macon Financial,Entegra, at which time each director will stand for election. Following the conversion, the directors of Macon FinancialEntegra will be divided into classes of directors serving one, two and three year terms and elected by the shareholders to serve such terms. See “Restrictions on Acquisition of Macon Financial”Entegra” on page. Currently, the directors of the Bank are elected annually by the directors of Bancorp. Following the conversion, Macon FinancialEntegra will elect the directors of the Bank, as its sole shareholder.

The table below sets forth certain information, as of March 31, 2011,1, 2014, regarding the members of our Board of Directors and the Board of the Bank.

 

Name

  

Age

  

Positions Held

  

Director Since

  

Term Expires

Ronald D. Beale

  55  Director  2002  2012

Adam W. Burrell, MD

  41  Director  2010  2012

Jim M. Garner

  58  Director  2006  2012

Stan M. Jeffress

  65  Director  2008  2012

Fred H. Jones

  45  Chairman  2005  2012

Beverly W. Mason

  58  Director  2007  2012

Roger D. Plemens

  55  Director, President and Chief Executive Officer  2004  2012

Edward R. Shatley

  70  Director  1992  2012

W. David Sweatt

  63  Director and Executive Chairman of the Bank  2011  2012

Name

  Age  

Positions Held

  Director Since  Term Expires

Ronald D. Beale

  58  Director  2002  2015

Louis E. Buck, Jr.

  65  Director  2012  2015

Adam W. Burrell, MD

  44  Director  2010  2015

Charles M. Edwards

  53  Director  2013  2015

Jim M. Garner

  61  Director  2006  2015

Stan M. Jeffress

  68  Vice Chairman  2008  2015

Fred H. Jones

  48  Chairman  2005  2015

Beverly W. Mason

  61  Director  2007  2015

Roger D. Plemens

  58  Director, President and Chief Executive Officer  2004  2015

The Business Background of Our Directors

The business experience of each director for at least the past five years is set forth below as well as a brief description of the qualifications and areas of expertise of each director that makes the director uniquely qualified to serve on our Board of Directors and the Bank Board. Each director brings special skills and attributes to our Board of Directors and the Bank Board through a variety of levels of education, business experience, director experience, banking experience, philanthropic interests, and community involvement.

Ronald D. Beale is President of Beale Construction, Inc., a construction firm based in Franklin, North Carolina, which has been in business since 1980. He is also President of LeRon, LLC, which owns and operates a variety of storage units and a convenience store in Franklin, North Carolina. Mr. Beale was elected as a County Commissioner for Macon County in 2005, and was re-elected in 2010. He is a member and past President of The Franklin Daybreak Rotary Club. He also serves as Chairman of the North Carolina Health and Human Services Committee, a committeeis President Elect of the North Carolina Association of County Commissioners. Mr. Beale was also selected as “Commissioner of the Year in North Carolina” for 2013. We believe that Mr. Beale’s business experience as well as his involvement in the community in which we conduct our business, well qualify him to serve as one of our directors.

Louis E. Buck, Jr. is a retired business executive and former Dean of the College of Business at Western Carolina University. Previously he was the Wesley Elingburg Distinguished Professor of Business Innovation and the Director of the Center for Entrepreneurship and Innovation (CEI) in the College of Business at Western

Carolina University. Mr. Buck has more than 25 years of business experience in the areas of finance, accounting, risk management and information systems. His last industry position was that of Chief Financial Officer for the competitive businesses of Consolidated Edison, Inc. in New York. He had served as the senior director of the Business Solutions practice for Walker Interactive Systems, Inc., the Chief Accounting Officer for Entergy Corporation, Chief Financial Officer for the North Carolina Electric Membership Corporation and in various management capacities at TXU Corporation. He has a B.S. degree from the United States Naval Academy, an MBA from the University of Houston / CLC and a Ph. D. (Finance) from Texas A&M University. We believe that Mr. Buck’s business and academic experience well qualifies him to serve as one of our directors.

Adam W. Burrell, MD is a Board Certified Family Physician currently practicing in Franklin, North Carolina. After completing his residency in Family Medicine, Dr. Burrell completed a Fellowship in Obstetrics. He is a member of the American Academy of Family Physicians. Dr. Burrell founded and currently manages a successful multi-physician medical practice focusing on family medicine. He has served as Chief of Staff for Angel Medical Center and is involved in numerous community activities including coaching youth basketball. We believe that Dr. Burrell’s management experience well qualify him to serve as one of our directors.

Charles M. Edwards is President and founder of C. Edwards Group, Inc., which has owned and operated several McDonald’s restaurant franchises for over 15 years throughout Henderson, Transylvania and Haywood Counties. Mr. Edwards is the managing member of Better Property Solutions, LLC and Wilson-Edwards Holdings, LLC, real estate management and holdings companies formed in 2006. Prior to starting his own companies, he served with McDonald’s Corporation as a consultant to hundreds of small business owners, providing expertise in franchising, finance, operations, marketing, human resources, and site development. He has served as President of McDonald’s Owner’s Advertising Association and currently serves as Government Relations Chairperson to the Association, representing over 700 restaurants nationwide. Mr. Edwards is heavily involved in the communities served by his businesses, having served as Chairman of the Henderson County Chamber of Commerce, as a member of the board of the Henderson County Community Foundation, and is active in the Hendersonville Rotary Club. We believe his business experience and strong sense community qualifies him to serve as one of our directors.

Jim M. Garner is an owner and a manager of The Wayah Agency, Inc., an independent insurance agency based in Franklin, North Carolina. Mr. Garner has been an independent insurance agent for 2730 years, managing a variety of commercial and personal accounts as well as serving as a partner in various real estate investments. We believe that Mr. Garner’s business experience and his connections within our business community well qualify him to serve as one of our directors.

Stan M. Jeffress is our former Chief Financial Officer and a retired Certified Public Accountant who was licensed in Tennessee, Mississippi, and Kentucky. He has experience in both national and regional public accounting firms as well as in industry and banking. His most recent experience before retirement in 2009 was 16 years of service as Chief Financial Officer of the Bank. We believe that Mr. Jeffress serves on the boardJeffress’ financial experience and background, as well as his knowledge of directorsour operations, well qualify him to serve as one of Macon Citizens Habilities, which provides opportunities for developmentally challenged individuals, and Orchard View, a low-income housing nonprofit organization, based in Macon County.our directors.

Fred H. Jones is President of Jones, Key, Melvin & Patton, P.A., a Franklin, North Carolina.Carolina based law firm founded by his great-grandfather in 1878. Jones was a Morehead Scholar at the University of North Carolina-Chapel

Hill (‘87)(1987). He has served as Chairman of the Board of Trustees of Angel Medical Center, and on the Boards of Directors of the Rabun Gap Nacoochee School, the Franklin Area Chamber of Commerce, Macon County Habitat for Humanity, and the Little Tennessee Watershed Association. Mr. Jones’ great-uncle was a founder of the Bank. We believe that Mr. Jones’ prior experience as a director well qualifies him to serve as one of our directors.

Beverly W. Mason is an owner and a broker of Lamplighter Realty, Inc. of Franklin, North Carolina. From August 1997 through January 2007, Ms. Mason was a co-owner and manager of Microtel-Franklin Hosp. LLC, a motel business, and from April 20112001 through June 2010, she was a co-owner and manager of WNC Investments, LLC, a rental real estate business. Ms. Mason has served as president of the Board of Realtors and has served as a member of a number of community boards including the County Board, the County Economic Development and the Board of Adjustments. We believe that Ms. Mason’s business and management experience, as well as her knowledge of the residential and commercial real estate industry in the community in which we operate, well qualify her to serve as a one of our directors.

Roger D. Plemens is our President and Chief Executive Officer. Mr. Plemens, who became President and Chief Executive Officer of Bancorp and the Bank in 2004, has served the Bank in various capacities, including mortgage officer, manager of mortgage lending, and Chief Lending Officer since joining the Bank in 1978. Mr. Plemens has 3336 years of banking experience. Mr. Plemens previously served on the Board of Trustees of Angel Medical Center and currently serves on various boards within the banking industry and the local community, including,as a director of The North Carolina Bankers Association,Association. Mr. Plemens currently serves on the boards of the Western Carolina University Foundation and Macon County Economic Development Commission.

Edward R. Shatley is a retired Insurance Executive. He was the President and Chief Executive Officer of Wayah Insurance Group from 1967 until 2002. He serves as the Chairman of the Macon County Economic Development Commission, and also serves on the Board of Trustees of Angel Medical Center.

W. David Sweatt is Executive Chairman of the Bank. Since 2005, and prior to his appointment in January 2011, he served as manager of SigNet Real Estate, LLC, a family owned real estate company. During this time he also served as manager of Dockpoint LLC, an internet services company. Previously, We believe that Mr. Sweatt held a number of senior executive and operational positions within a variety of financial institutions situated throughout the Southeast. He was Executive Chairman of Chattahoochee National Bank, a de novo community bank, based in Alpharetta, Georgia, also serving as Chairman of its holding company, CNB Holdings of Georgia, Inc. He served as President and Chief Executive Officer of Royal Bankshares of Acadiana, Inc., a bank holding company, and its subsidiaries, Bank of Lafayette, an established community bank, and Trust Bank of the U.S., a non-depository trust company, all based in Lafayette, Louisiana. Previously, he served as President and Chief Executive Officer of First National Bank of Lafayette. Earlier in his career, Mr. Sweatt was employed in various operational capacities at First National Bank of South Carolina and First Tennessee Banks of Memphis and Knoxville. Mr. Sweatt has 30Plemens’ 36 years of banking experience.experience, as well as his leadership experience, well qualify him to serve as one of our directors.

Director Independence

We have reviewed transactions, relationships and other arrangements involving our directors to determine which directors we consider to be “independent.” In making those determinations, we have applied the independence criteria contained in the listing requirements of The NASDAQ Stock Market. We will continue to assess each outside director’s independence and monitor the status of each director on an ongoing basis for changes in factors or circumstances that may affect a director’s ability to exercise independent judgment.

In addition to the specific NASDAQ criteria, in assessing the independence of our directors, we will consider whether transactions required to be disclosed in our proxy statements as “related person transactions,” as well as any other transactions, relationships, arrangements, or factors, could impair a director’s ability to exercise independent judgment, including the Bank’s lending relationships with directors and the transactions described under the caption “Certain Relationships and Related Parties”Transactions” on page         __..

Based on our review, each of our directors, except for Messrs. Jeffress,Mr. Plemens, and Sweatt areis considered independent under the rules and listing standards of The NASDAQ Stock Market.

Directors’ Compensation

The following table shows, for the year ended December 31, 2010,2013, the cash compensation paid by us, as well as certain other compensation paid or accrued for the year ended December 31, 2013, to directors who are not named executive officers.

DIRECTOR COMPENSATION TABLE

 

Name(4)(1)

  Fees Earned
or Paid
in Cash  ($)(5)
   Nonqualified
Deferred
Compensation
Earnings ($)(6)
   All Other
Compensation ($)(7)
   Total ($)   Fees Earned
or Paid
in Cash ($)
   Nonqualified
Deferred
Compensation
Earnings ($)(2)
   All Other
Compensation
($)(3)
   Total ($) 

Ronald D. Beale

   19,950     2,913     5,015     27,878     18,350     —       —       18,350  

Louis E. Buck, Jr.

   19,100     —       —       19,100  

Adam W. Burrell, MD

   6,750     —       —       6,750     19,100     —       —       19,100  

Charles M. Edwards

   6,350     —       —       6,350  

Jim M. Garner

   21,100     303     5,080     26,483     28,850     —       —       28,850  

D. Edward Henson(1)

   19,550     53,710     9,122     82,382  

Stan M. Jeffress

   19,600     —       4,900     24,500     29,100     —       —       24,100  

Fred H. Jones

   19,350     179     2,796     22,325     25,350     —       —       25,350  

Beverly W. Mason

   21,600     339     4,264     26,203     25,350     —       —       25,350  

Daniel L. Rogers(2)

   10,650     79,166     6,876     96,692  

Edward R. Shatley

   22,100     5,132     9,036     36,268  

W. David Sweatt(3)

   —       —       —       —    

Edward R. Shatley(4)

   12,450     71,300     5,353     89,085  

(1)

Mr. Henson resigned as a director of Bancorp and the Bank effective September 18, 2010.

(2)

Mr. Rogers resigned as a director of Bancorp and the Bank effective March 24, 2010.

(3)

Mr. Sweatt became a director of Bancorp and the Bank effective January 19, 2011. As such, no compensation was paid to him in the year ended December 31, 2010.

(4)

For information on the fees paid to Roger D. Plemens for his service as a director, see the Summary Compensation Table on page.

(2)(5)

Directors have the option to receive the Board retainer and/or Board fees in cash or to defer such retainer or fees pursuant to the CAP Plan (defined below).

(6)

Except for Mr. Jeffress, Mr. Rogers and Mr. Henson, theThe amounts reported represent the interest credited on deferred earnings under the CAP Plan.Plan (as defined below). For Mr. Jeffress, the amounts do not include the following: $417,313 paid under the CAP Plan (including(which includes compensation that Mr. Jeffress deferred during his employment with the Bank) and $65,982$98,973 paid under Mr. Jeffress’ Supplemental Executive Retirement Plan. These amounts represent payments toAfter March 2014, Mr. Jeffress for his service as an executive officer of the Bank andwill not as a director. The amounts reported for Mr. Rogers are comprised of $79,074 paidreceive any further payments under the CAP Plan and $92 in interest on Mr. Rogers’ deferred earnings. The amounts reported for Mr. Henson represent $48,228 paid under the CAP Plan and $5,482 in interest on Mr. Henson’s deferred earnings.

Plan.
(7)(3) 

Amounts included in “All Other Compensation” are as follows:

Name

  Premiums Paid on
Long Term

Care Insurance ($)
   Split Dollar
Imputed Income ($)
   Director
Consultation
Plan Payout ($) (b)
 

Ronald D. Beale

   5,015     —       —    

Adam W. Burrell, MD

   —       —       —    

Jim M. Garner

   5,080     —       —    

D. Edward Henson

   5,732     1,890     1,500  

Stan M. Jeffress(a)

   4,900     —       —    

Fred H. Jones

   2,796     —       —    

Beverly W. Mason

   4,264     —       —    

Daniel L. Rogers

   4,395     405     2,076  

Edward R. Shatley

   8,025     1,011     —    

W. David Sweatt

   —       —       —    

(a)

Does not include $1,135further described in Split Dollar Imputed Income for Mr. Jeffress, which was attributable to Mr. Jeffress’ service as an executive officer of the Bank.

below table.
(4)(b)

Represents amount paid to Mr. Henson under the Director Consultation Plan, and amounts accrued for Mr. Rogers.

Shatley retired from our Board in April, 2013.

Name

  Split Dollar
Imputed Income ($)
   Director
Consultation
Plan Payout ($)
 

Ronald D. Beale

   —       —    

Louis E. Buck, Jr.

   —       —    

Adam W. Burrell, MD

   —       —    

Charles M. Edwards

   —       —    

Jim M. Garner

   —       —    

Stan M. Jeffress

   —       —    

Fred H. Jones

   —       —    

Beverly W. Mason

   —       —    

Edward R. Shatley

   1,335     4,000  

Directors’ Fees and Practices

During the year ended December 31, 2010,2013, each directorof our directors then in office (other than Mr. Henson, Mr. SweattMessrs. Garner and Mr. Shatley)Jones) received an annual board retainer fee of $7,500. Mr. Henson,Jones, as Chairman of our Board of Directors during the year ended December 31, 2010, and Mr. Shatley,Garner as the Chairman of the Bank Board, during the year ended December 31, 2010, each received an annual board retainer fee of $10,500. The annual board retainer fee is paid in January of each fiscal year. In addition, during the year ended December 31, 2010, each director, including2013, our Chairman,directors, received $400$800 for each meeting of the Board of Directors attended, paid monthly. During the year ended December 31, 2010, each director, including the Chair of a board committee,he or she attended. Directors also received $250 for each attendedcommittee meeting of a board committee of which he or she was a member,attended, including meetings of committees of the Bank Board.

Director Split Dollar Agreements

The Bank owns insurance policies on the lives of onecertain current director, Edward R. Shatley, and former directors, D. Edward Henson and Daniel L. Rogers.directors. The Bank has entered into endorsement split dollar agreements with Mr. Shatley, Mr. Henson,these current and Mr. Rogersformer directors under which the Bank (1)(i) pays the premiums associated with such policies and (2)(ii) agrees to share a portion of the death benefits payable under the life insurance policies with the beneficiaries designated by the directors. When the director dies, the Bank will be entitled to an amount equal to the greater of (i) the cash value of the policy, (ii) the aggregate premiums paid on the policy by the Bank less any outstanding indebtedness to the insurer, or (iii) the total death proceeds less the sum of as set forth in the agreement to be paid to the director’s beneficiary (the “Beneficiary Amount”). The director’s beneficiary will be entitled to the remainder of the death proceeds, if any. The Bank expects to always receive the full cash value of the policy. The Beneficiary Amount for each director is $300,000. Mr. Henson retired in 2010 after attaining age 65 and retains the ability to name a beneficiary for the Beneficiary Amount. Mr. Rogers retired prior to age 65 and forfeited his right to name a beneficiary with respect to any portion of the policy on his life; the Bank continues to own that policy and is the sole beneficiary of the policy.

If a director is terminated from our Board of Directors for cause, he will forfeit his right to name a beneficiary of the Beneficiary Amount. If a director is terminated from our Board of Directors after becoming disabled or upon retirement on or after age 65, the insurance policy will be continued until the director’s death and his right to name a beneficiary of the Beneficiary Amount will continue until his death. If the director terminates from our Board of Directors for any reason other than those previously discussed, the Bank has no obligation to continue to pay premiums on the director’s policy and the director will have 30 days within which to purchase the policy from the Bank for its cash value at that time if he so chooses. If he does not so choose, the Bank may choose whether or not to continue the policy in its sole discretion.

Director Survivor Income Agreements

The Bank has purchased insurance policies on the lives of Ronald D. Beale, Jim M. Garner, Fred H. Jones and Beverly W. Mason. The entire death benefit is paid to the Bank, which then pays the director’s beneficiary a $100,000 death benefit within 60 days of receipt of the death certificate. If a director is terminated from our Board of Directors, the death benefit is forfeited.

Long Term Capital Appreciation Plan

As discussed below under “– Deferred Compensation, Retirement and Other Benefits” on page, the CAP Plan (as defined below) provides benefits to directors as well as executives. The following active directors are participants in the CAP Plan: Ronald D. Beale, Jim M. Garner, Stan M. Jeffress, Fred H. Jones, Beverly W. Mason and Roger D. Plemens, and Edward R. Shatley.Plemens.

Long Term Care Insurance

The Bank pays for the premiums for each director (other than Mr. SweattMessrs. Buck, Edwards and R. Burrell) and such director’s spouse to obtain long-term care insurance.

Director Consultation Plan

In addition to the above, D. Edward Henson, Daniel L. Rogers and Edward R. Shatley are entitled to participate in the Director Consultation Plan. The Director Consultation Plan was discontinued and no other current directors are eligible to participate. Under the Director Consultation Plan, when a director reaches the age of 65 and retires from the Board of Directors, he or she is entitled to receive $500 per month for 20 years. D. Edward Henson currently receives payments under the Director Consultation Plan. Daniel L. Rogers, a director who retired on March 24, 2010, will receive payments upon reaching the age of 65. Edward R. Shatley is over 65, and will receive payments under theThe Director Consultation Plan upon his retirement as a director of the Board of Directors.was discontinued and no current directors are eligible to participate. During the year ended December 31, 2010,2013, we paid a total of $7,500$16,000 to former directors participating in the Director Consultation Plan. The Bank accrues for the liabilities associated with the payments under the Director Consultation Plan.

Meetings and Committees of the Board of Directors

In connection with the completion of the conversion, Macon FinancialEntegra will establish a nominating and corporate governance committee, a compensation committee and an audit committee. All of the members of these committees will be independent directors as defined in the listing standards of The NASDAQ Stock Market. WeUpon completion of the conversion, we plan to have written charters for each committee available on our website at www.maconbank.com.

During the year ended December 31, 2010,2013, the Board held 2412 regular meetings and notwo special meetings. No director attended fewer than 75% of the total meetings of the Board of Directors and committees on which he or she served during this period. While we will establish new committees following the conversion, the Bank currently has standing Executive, Audit, Loan, Compensation and Nominating Committees. The Executive and Audit Committees are joint committees of Bancorp and the Bank.

The Executive Committee consists of Directors Shatley, Garner, Jones, Jeffress and Jeffress.Mason. The Executive Committee meets on an as needed basis to discuss items of concern to Bancorp and the Bank. The flexible meeting schedule allows for advance discussion of items appearing on the board agenda and review of issues of concern that arise in between scheduled board meetings. The Executive Committee did not meetmet 11 times during the year ended December 31, 2010.2013.

The Audit Committee consists of Directors Buck, Burrell, Jeffress Jones and Shatley.Jones. The Audit Committee meets quarterly and on an as needed basis. The Audit Committee oversees the design and operation of Bancorp’s and the Bank’s internal controls for safeguarding itstheir assets and ensuring the quality and integrity of financial reporting. The Audit Committee hires the independent auditor and reviews the audit report prepared by the independent auditor. At this time, we have notMr. Buck has been designated a member ofby the Audit CommitteeBoard as the “Audit Committee Financial Expert” in accordance with the rules and regulations of the SEC. The Audit Committee met three times during the year ended December 31, 2010. Upon completion of the conversion, Director Jeffress will not serve on the Audit Committee.2013.

The Loan Committee consists of Directors Edwards, Garner, Jeffress, Mason Plemens and Sweatt.Plemens. The Loan Committee meets on a bi-monthlysemi-monthly basis to approve or decline those loans that exceed the authority vested in the Bank’s officers and makes recommendations to the Bank Board regarding those loans that exceed its approval authority. The Loan Committee also has the authority to set interest rates, terms and conditions for the Bank’s loan programs and may extend, modify, defer, purchase, participate or sell the Bank’s existing or potential investment in any loan or extension of credit subject to limitations. The Loan Committee met 12 times during the year ended December 31, 2010.2013.

The Compensation Committee consists of Directors Edwards, Garner, Jeffress Jones and Shatley.Jones. The Compensation Committee meets on an as needed basis, and provides general oversight regarding the personnel, compensation and benefits matters of the Bank. The Compensation Committee did not meet during the year ended December 31, 2010. Upon completion of the conversion, Director Jeffress will not serve on the Compensation Committee.2013.

The Nominating Committee consists of Directors Beale and Mason. The Nominating Committee is responsible for the annual selection of nominees for election as directors. The Nominating Committee met once during the year ended December 31, 2010.2013.

Corporate Governance Policies and Procedures

The Bank has adopted a Code of Business Conduct and Ethics and a Conflict of Interest Policy that are applicable to directors, officers and employees. Following the conversion, Macon FinancialEntegra will adopt a corporate governance policy and a code of business conduct and ethics. The corporate governance policy is expected to cover such matters as the following:

 

the duties and responsibilities of each director;

 

the composition, responsibilities and operation of the Board of Directors;

 

the establishment and operation of board committees;

 

succession planning;

 

convening executive sessions of independent directors;

 

the Board of Directors’ interaction with management and third parties; and

 

the evaluation of the performance of the Board of Directors and the Chief Executive Officer.

The code of business conduct and ethics, which is expected to apply to all employees and directors, will address conflicts of interest, the treatment of confidential information, general employee conduct and compliance with applicable laws, rules and regulations. In addition, the code of business conduct and ethics will be designed to deter wrongdoing and to promote honest and ethical conduct in every respect.

We currently do not have any outside shareholders. Following the conversion, BancorpEntegra will establish a process for shareholders to communicate with our Board of Directors. A policy regarding director attendance at annual meetings of shareholders will also be established.

Leadership Structure

The positions of Chief Executive Officer and Chairman of the Board of Directors are separate. We continue to believe that this structure provides appropriate division and oversight. Industry events of the last 24 to 36 months demonstrateWe believe that this structure is most likely to prevent a strong Chief Executive Officer from leading the organization in inappropriate directions. We believe it is one more method to create appropriate “checks and balances” in corporate governance.

Board Involvement in Risk Management Process

Risk management is the responsibility of management and risk oversight is the responsibility of the Board of Directors. The Board of Directors administers its risk oversight function and also utilizes its committee structure, with each board committee being responsible for overseeing risk within its area of responsibility. Significant risk oversight matters considered by the committees are reported to and considered by the Board of Directors. Some significant risk oversight matters are reported directly to the Board of Directors, including matters not falling within the area of responsibility of any committee. Types of risk with the potential to adversely affect us include credit, interest rate, liquidity and compliance risks, as well as risks relating to our operations and reputation.

Directors keep themselves informed of the activities and condition of the Bank and of the risk environment in which it operates by regularly attending Board of Directors and assigned board committee meetings, and by review of meeting materials, auditors’ findings and recommendations, and supervisory communications. Directors stay current on general industry trends and any statutory and regulatory developments pertinent to us by periodic briefings by executive management, counsel, auditors or other consultants, and by more formal director education, including attendance at regulator sponsored “Director��s“Director’s College” conventions, and other similar programs. Directors are provided access to all training and given specific in-person training on items such as Regulation “O”, Bank Secrecy Act, and other banking guidance and regulations.

The Board of Directors oversees the conduct of our business and administers the risk management function by:

 

selecting, evaluating, and retaining competent executive management;

 

establishing, with executive management, our long- and short-term business objectives, and adopting operating policies to achieve these objectives in a legal and sound manner;

 

monitoring operations to ensure that they are controlled adequately and are in compliance with laws and policies;

 

overseeing our business performance; and

 

ensuring that we help to meet our communities’ credit needs.

These responsibilities are governed by a complex framework of federal and state law and regulation as well as regulatory guidelines applicable to our operations.

The Board will ensure, following the conversion, that all significant risk-taking activities are covered by written policies that are communicated to appropriate employees. Specific policies will cover material credit, market, liquidity, operational, legal and reputation risks. The policies will be formulated to further our business plan in a manner consistent with safe and sound practices. The Board of Directors will ensure that all such policies are monitored by executive management to make certain that they conform with changes in laws and regulations, economic conditions, and our circumstances. The policies will be implemented by executive management who will develop and maintain procedures, including a system of internal controls, designed to foster sound practices, to comply with laws and regulations, and to protect us against external crimes and internal fraud and abuse. Policies will be reviewed on a regular basis typically annually or bi-annually and revisions approved by our Board.

Management regularly provides the Board and its various committees with a significant amount of information regarding a wide variety of matters affecting us. This includes executive management reports to the Board. These reports present information in a form meaningful to members of the Board of Directors, who recognize that the level of detail and frequency of individual executive management reports will vary with the nature of risk under consideration and our unique circumstances. Matters presented to the Board of Directors and board committees generally include information with respect to risk. The Board of Directors and board committees consider the risk aspects of such information and often request additional information with respect to issues that may involve risk to the Bank. The Board of Directors and board committees also raise risk issues on their own initiative.

Executive Officers Who Are Not Directors

The current executive officers of Macon FinancialEntegra consist of the same individuals who are executive officers of Bancorp and the Bank. Each executive officer of the Bank and Bancorp will retain his or her office following the conversion. The business experience for at least the past five years for the executive officers who do not serve as directors of Macon Financial,Entegra, Bancorp or the Bank is set forth below, with ages given as of March 31, 2011.1, 2014.

Gary L. BrownDavid A. Bright, CPA (age 64)43) is a First Vice President and our Chief CreditFinancial Officer. Mr. Bright is responsible for the accounting and financial reporting areas. Prior to his appointmentjoining us in February 2011, heSeptember of 2013, Mr. Bright was the Post Closing Asset Managera Partner with KPMG LLP, specialized in the DivisionFinancial Services industry. Mr. Bright joined KPMG LLP in 1992 and served in various capacities in the Greenville, South Carolina; Harrisburg, Pennsylvania; Richmond, Virginia; and Pittsburgh, Pennsylvania offices during his 21-year career. His experience includes working with a variety of Resolutions

community, regional and Receiverships of the FDIC, Jacksonville, Florida, from November 2009 until February 2011. Between May 2008global banks as well as investment funds, insurance companies and November 2009, he was Principal of Brown Group, LLC, basedbroker dealers. Mr. Bright holds a current CPA license in Southport, NorthPennsylvania, and inactive licenses in South Carolina, where he provided consulting services to community banks. Between October 2005Virginia, New York and May 2008, he was President and Chief Executive Officer of Traders Bank, a community bank based in Spencer, West Virginia. HeNew Jersey. Mr. Bright has also served Fifth Third Bank as Commercial Lending Division Head, and BB&T as City Executive/Senior Lender. Mr. Brown has 3422 years of banking experience.

Anthony CataldiLaura W. Clark (age 39)43) is a First Vice President and our Chief OperationsRisk Officer. Mr. Cataldi is responsible for all loanMs. Clark oversees the internal audit and deposit operations areascompliance functions of the Bank and works closely with the Chief Technology Officer, Chief Credit Administration Officer, Security Officer and other Executive Management members to ensure appropriate risk management strategies are employed throughout the Bank to avoid, control, retain, or transfer identified risk exposures. She serves on the ALCO, Technology, Business Continuity, Vendor Management and Compliance Committees of the Bank. Prior to her appointment as wellChief Risk Officer in February of 2013, she served as the call center and collection departments. Prior to his appointment in April of 2007, he was Director of Operations at The Lyons National Bank, a community bank based in Lyons, New York, where he was responsible for branch operations, information technology, deposit operations, compliance, and the facilities departments, from October, 2002, until April, 2007. Mr. CataldiBank’s Compliance Officer since 2001. Ms. Clark has 1521 years of banking experience.

Carolyn H. Huscusson (age 58)61) is a Senior Vice President and our Chief Retail Officer. Ms. Huscusson is responsible for overseeing the operation of our branch office network, as well as the marketing department.department and call center. Prior to joining the Bank in 1997, she was City Executive and Vice President at First Citizens Bank. Ms. Huscusson has 3639 years of banking experience.

Marcia J. Ringle (age 55)58) is a Vice President and our Corporate Secretary. Ms. Ringle is a member of our Executive Committee and serves on the Bank’s Information Technology and Management Council Committees.Committee. She has 27 years of experience in banking, primarily in retail and administration, and has been with the Bank since 1988.

Ryan M. ScaggsBobby D. Sanders, II (age 36)34) is a First Vice President and our Chief FinancialCredit Administration Officer. Mr. Sanders is responsible for commercial credit administration, residential mortgage loan underwriting and processing, consumer loan administration, loan operations, special assets, and collections. Prior to assuming his current role in February of 2013, he served as Director of Commercial Lending since July of 2009, and Commercial Credit Administrator since August of 2008. Mr. Sanders has managed the Bank’s commercial credit departments continuously since 2006, except for a short period of time during which he served as an Area Commercial Lending Officer. He has been the primary liaison between the Bank and the banking regulators on all lending and credit quality matters since 2009. Mr. Sanders has obtained Credit Risk Certification from the Risk Management Association (RMA). Mr. Sanders has 10 years of banking experience.

Ryan M. Scaggs (age 39) is a Senior Vice President and our Chief Operating Officer. Mr. Scaggs is responsible for the accounting and treasury departments, as well asour deposit operations, facilities, human resources, information technology, internal loan review, and facilities.treasury departments. Prior to assuming the role of Chief Operating Officer in February of 2013, he served as Chief Financial Officer insince December of 2008, he served as the Bank’sand Controller since February of 2006. Prior to joining the Bank, he was employed in various finance and accounting roles at Wachovia Bank and Bank of America. Mr. Scaggs has 1316 years of banking experience.

Compensation Discussion

In this section, we will give an overview of our compensation program, the material compensation decisions we have made under the program and the material factors that we considered in making those decisions. Following this discussion, in the section entitled “Executive“– Executive Compensation,” we provide a table containing specific information about the compensation earned in the year ended December 31, 20102013 by the following officers, who are known as our named executive officers:

Roger D. Plemens, President and Chief Executive OfficerOfficer;

Ryan M. Scaggs, FirstSenior Vice President and Chief Financial OfficerOperating Officer; and

Carolyn H. Huscusson, Senior Vice President and Chief Retail Officer

Officer.

Objectives and Overview of the Compensation Program.Our executive compensation policies are designed to establish an appropriate relationship between executive pay and our annual and long-term performance to reflect the attainment of short- and long-term financial performance goals and to enhance our ability to attract and retain qualified executive officers. The principles underlying the executive compensation policies include the following:

 

to attract and retain key executives who are vital to our long-term success and are of the highest caliber;

 

to provide levels of compensation competitive with those offered to community banks in the Southeast and consistent with our level of performance;

 

to motivate executives to enhance our long-term financial performance, and

 

to integrate the compensation program with our annual and long-term strategic planning and performance measurement processes.

We consider a variety of subjective and objective factors in determining the compensation package for individual executives, including: (1)(i) the performance of the Bank as a whole, with emphasis on annual performance factors and long-term objectives; (2)(ii) the responsibilities assigned to each executive; and (3)(iii) the performance of each executive of assigned responsibilities as measured by our progress during the year.

Compensation Program Elements.Our compensation program focuses primarily on the following three components in forming the total compensation package for our named executive officers:

 

base salary;

 

incentive compensation; and

 

deferred compensation, retirement and other benefits.

Base Salary.The purpose of base salary is to create a secure base of cash compensation for our employees, reflecting each employee’s level of responsibilities. Salary levels are designed to be competitive within the banking and financial services industries in the Southeast. In setting salary levels, we regularly evaluate current salary levels by surveying similar institutions in North Carolina, South Carolina, Georgia and the Southeast. The survey analysis focuses primarily on asset size, nature of ownership, type of operation and other common factors.

Incentive Compensation Program. We believe it is appropriate to provide employees with a portion of their compensation contingent upon meeting pre-defined performance requirement objectives. Our incentive compensation plan, known as the Macon Bank Stakeholders Plan (the “Stakeholders Plan”), is designed to provide incentive cash compensation based on a number of key performance measures based on a number of factors, including but not limited to, net interest margin, noninterest income, expense controls, customer service and deposit and loan growth. All employees are eligible to participate in the Stakeholders Plan. The Stakeholders Plan has been suspended since 2008.

Deferred Compensation, Retirement and Other Benefits

401(k) Plan.The Macon Bank 401(k) Retirement Plan (the “401(k) Plan”) is a tax-qualified defined contribution plan designed to provide eligible employees of the Bank a vehicle for increasing their retirement savings. After 30 days of employment, each Bank employee is eligible to participate in the 401(k) Plan after attaining the age of 21. Once eligible, each employee may participate on the first day of the calendar quarter following the employee’s first 30 days of employment. All of the named executive officers participated in the 401(k) Plan on the same basis as all other eligible employees of the Bank. Each eligible employee of the Bank can elect to contribute on a pre-tax basis to the 401(k) Plan a minimum of 1% of his or her compensation, up to the maximum allowed by law. The Bank matches an employee’s contribution at 100% of each eligible employee’s pre-tax contributions on the first 3%2% of contributions and 50% on the next 3%2% of contributions, with a maximum match of 4.5%3%. The matching contributions for the named executive officers were based on a formula contained in the terms of the 401(k) Plan and were not related the Bancorp’s, the Bank’s or the individual officer’s performance for the year.

Salary Continuation Agreements.On June 23, 2003, the Bank entered into a salary continuation agreement with Roger D. Plemens. On November 6, 2007, the Bank entered into a salary continuation agreement with Carolyn H. Huscusson. The salary continuation agreements promise a fixed benefit for each

executive beginning at age 65 and continuing for a period of 18 years. Under the salary continuation agreements, the annual benefit for Mr. Plemens is $110,901, and $60,900 for Ms. Huscusson. The salary continuation agreements promiseprovide for a lesserreduced benefit in the case of early termination before the normal retirement age or in the case of termination because of disability, but in both cases benefits do not become payable until the executive attains age 65. The early termination benefits are subject to a vesting schedule, becoming vestedwith benefits vesting annually in 20% increments annually until 100% vesting. The executives’ contractualincrements. Employee entitlements under the salary continuation agreements are contractual liabilities of the Bank and are not funded. The Bank has accrued the present value of thethese liabilities associated with the salary continuation agreements.associated.

If a change in control of the Bank occurs, benefits are determined as if the executives had reached age 65 at the time of the change in control. The payments do not begin, however, until the executives actually attain age 65. Benefits are not payable to an executive if his or her employment is terminated for cause.

Executive Split Dollar Life Insurance Agreements.The Bank owns an insurance policy on the life of Mr. Plemens and Mr. Jeffress. On April 14, 1999, the Bank entered into endorsement split dollar agreements with each of Mr. Plemens and Mr. Jeffress, under which the Bank (1)(i) pays the premiums associated with such policies and (2)(ii) agrees to share a portion of the death benefits payable under the life insurance policies with the beneficiariesbeneficiary designated by Mr. Plemens and Mr. Jeffress.the insured. When Mr. Plemens or Mr. Jeffressthe insured dies, the Bank will be entitled to an amount equal to the greater of (i) the cash value of the

policy, (ii) the aggregate premiums paid on the policy by the Bank less any outstanding indebtedness to the insurer, or (iii) the total death proceeds less the sum as set forth in the agreement to be paid to the designated beneficiary (the “Beneficiary Amount”). The designated beneficiary will be entitled to the remainder of the death proceeds, if any. The Bank expects to always receive the full cash value of the policies. The Beneficiary Amount is $1,450,000 for Mr. PlemensPlemens’ policy, and $375,000 for Mr. Jeffress.Jeffress’ policy. As of MarchDecember 31, 2011,2013, the death benefit of the policies was $5,079,364 for Mr. PlemensPlemens’ policy was $5,151,899, and $3,203,408$3,259,838 for Mr. Jeffress.Jeffress’ policy.

If Mr. Plemens is terminated for cause, he will forfeit his right to nameappoint a beneficiary ofto receive the Beneficiary Amount. If Mr. Plemens terminatesPlemens’ employment after becoming disabledis terminated as a consequence of disability or upon retirement on or after age 65, the Bank will continue to pay the premiums on the insurance policy and Mr. Plemens will be continued untilcontinue to have the right to appoint a beneficiary to receive the Beneficiary Amount. If Mr. Plemens’ death and his right to name a beneficiary of the Beneficiary Amount will continue until his death. If Mr. Plemens terminates employment is terminated for any other reason, other than those previously discussed, the Company has no obligation toBank will not continue to pay premiums on the policy and Mr. Plemens will have 30 days within which tohe may purchase the policy from the CompanyBank for its cash value at that time if he so chooses.value. If he does not so choose,purchase the Companypolicy, the Bank may choose whethercontinue or not to continueterminate the policy in its sole discretion.

Mr. Jeffress became a director of Bancorp and the Bank in January 2008, and retired as our Chief Financial Officer in January 2009. The Board of Directors determined to continue to pay the premiums on Mr. Jeffress’ policy and his rightallow him to nameappoint a beneficiary of the Beneficiary Amount until his death.Amount.

Executive Survivor Income Agreements.Agreements. The Bank has purchased insurance policies on the lives of Ryan M. Scaggs and Carolyn H. Huscusson. The entire death benefit is paidpayable to the Bank, and from which then pays the executive’s beneficiary is entitled to receive a $100,000 death benefit.benefit, if the executive is employed by the Bank at the time of his or her death.

Long Term Capital Appreciation Plan.The Bank adopted a long term capital appreciation plan in 1998 to provide benefits to directors and executive officers (the “CAP Plan”). The CAP Plan was frozen effective as of February 28, 2011.

The CAP Plan was put in place as a substitute for stock options which, as a mutual organization, were not available to directors or executive officers.available. The CAP Plan was restated on December 15, 2004. AnIn 1998, an initial contribution of $4,500 was made by the Bank on behalf of all initial director participants in the CAP Plan in 1998.participants. The CAP Plan permitspermitted participants to defer directors’ fees and any other cash compensation into the plan on a pre-tax basis. The initial contribution by the Bank contribution and any participant deferrals are alwayswere 100% vested and accrueaccrued earnings based upon the Bank’s return on equity. The Board of Directors can also awardawarded Capital Appreciation Rights to participants in the CAP Plan. Capital Appreciation Rights provideappreciation rights provided a benefit determined by determining the appreciation in the book value of the Bank from the date of an award of a Capital Appreciation Right andthrough the book value of the Bank at the timedate of the participant’s termination from the Bank. Capital Appreciation Rights vestappreciation rights vested incrementally at 10% per year on an after July 1, 1988.1998. Capital Appreciation Rights areappreciation rights were forfeited if a participant iswas terminated for just cause. Capital Appreciation Rights vestappreciation rights vested 100% upon the participant’s death, disability or upon a change in control of the Bank.

Benefits are paid upon termination from the Bank. A participant’s account balance is determined at that time, and payments begin the first day of the month following termination. Once an account is in pay“pay status, it” the account balance accrues interest at a rate of 8%8.0% per annum until paid in full. Benefits are paid on a monthly basis for a period of five years unless otherwise elected by the participants. Participants may elect to have their payments made in monthly installments over any period between five and 10 years. Participants can also elect a lump sum form of payment to be paid in any year from the second to the tenth year following termination. If a change in control of the Bank occurs, benefits are paid in a lump sum upon the change in control or, if the executive elects, over a period of five to 10 years. If a participant dies duringwhile his account is in “pay status,” the paymentremaining balance of his benefits under the CAP Plan, the remainder of his account balance is paid to his beneficiary within 60 days of the participant’s death.

The CAP Plan was frozen effective asWhile all of February 28, 2011. The effect of this action is that participation, vesting, and benefit accruals are frozen as of February 28, 2011.

The followingour named executivesexecutive officers are participants in the CAP Plan: Roger D. Plemens, Carolyn H. Huscusson and Ryan M. Scaggs. OnlyPlan, only Mr. Plemens and Ms. Huscusson have positive account balances. The executives’ contractual entitlements under the CAP Plan are contractual liabilities of the Bank and are not funded. However, in anticipation of the payouts becoming due under the CAP Plan, the Bank purchased life insurance to help pay for the costs associated thereunder. The Bank has accrued the present value of the liabilities associated with the CAP Plan.

Other Benefits. Executive officers are entitled to participate in fringe benefit plans offered to all employees including health and dental insurance plans and life, accidental death and dismemberment and long-term disability plans.

Executive Compensation

Summary Compensation Table. The following table shows information paid to our named executive officers for the year ended December 31, 2010.2013.

SUMMARY COMPENSATION TABLE

 

Name and Principal Position

  Salary($)   Bonus($)(1)   All Other
Compensation($)(2)
   Total($) 

Roger D. Plemens

Chief Executive Officer and President

   270,000     350     47,423     317,773  

Ryan M. Scaggs

First Vice President and Chief Financial Officer

   142,000     350     16,017     158,367  

Carolyn H. Huscusson

Senior Vice President and Chief Retail Officer

   152,000     350     17,859     170,209  

Name and Principal Position

  Salary($)   Bonus($)   All Other
Compensation($)(1)
   Total($) 

Roger D. Plemens

   270,000     —       47,937     317,937  

Chief Executive Officer and President

        

Ryan M. Scaggs

   149,133     —       14,735     163,868  

Senior Vice President and Chief Operating Officer

        

Carolyn H. Huscusson

   152,000     —       15,829     167,829  

Senior Vice President and Chief Retail Officer

        

 

(1)(1) 

Represents a discretionary bonus paid to each named executive officer.

(2)

The amounts reported in “All Other Compensation” are comprised of the items listed in the following table:

 

Name and

Principal Position

  Director
Fees
   Employer
401(k)
Match($)
   Paid
Time

Off($)(a)
   Premiums
Paid on Long
Term Care
Insurance($)
   Premiums
Paid on
Supplemental
Income
Protection($)
   Premiums
Paid on
Long Term
Disability
Insurance($)
   Premiums
Paid on
Group Life
Insurance($)
   Premiums Paid
on Group
Health
Insurance($)(b)
 

Roger D. Plemens

Chief Executive Officer and President

   20,700     8,569     5,192     3,761     1,624     1,053     356     6,168  

Ryan M. Scaggs

First Vice President and Chief Financial Officer

   —       6,337     2,731     —       —       554     227     6,168  

Carolyn H. Huscusson

Senior Vice President and Chief Retail Officer

   —       6,813     2,923     —       1,119     593     243     6,168  

Name and Principal Position

 Director
Fees ($)
  Employer
401(k)
Match($)
  Paid
Time

Off($)(1)
  Premiums
Paid on
Supplemental
Income
Protection($)
  Premiums
Paid on
Long Term
Disability
Insurance($)
  Premiums
Paid on
Group Life
Insurance($)
  Premiums
Paid on
Group Health
Insurance($)
  Premiums
Paid on
Split Dollar
Death
Benefit($)
 

Roger D. Plemens

  22,300    8,228    5,192    1,624    975    395    6,526    2,697  

Chief Executive Officer and President

        

Ryan M. Scaggs

  —      4,451    2,923    —      593    242    6,526    —    

Senior Vice President and Chief Operating Officer

        

Carolyn H. Huscusson

  —      4,426    2,923    1,119    593    242    6,526    —    

Senior Vice President and Chief Retail Officer

        

 

(a)(1) 

Represents amount of unused accrued “paid time off” paid to the named executive officer.

(b)

Includes $89 paid to Mr. Scaggs’ Health Savings Account, and $366 paid to Ms. Huscusson’s Health Savings Account.

Employment Agreements

We have not entered into an employment agreement with any named executive officer. However, upon completion of the conversion, we intend to enter into employment agreements with certain of our executive officers. See “– Benefits to be Considered Following Completion of the Conversion” beginning on page.Conversion,” below.

Outstanding Equity Awards at Fiscal Year-End

Since Bancorp is currently a mutual holding company, there are no outstanding equity awards.

Benefits to be Considered Following Completion of the Conversion

Employment Agreements. Upon completion of the conversion, we will enter into Employmentemployment and Changechange of Control Agreementscontrol agreements with Roger D. Plemens, our President and Chief Executive Officer, Roger D. Plemens, Executive Chairman of the Bank, W.Ryan M. Scaggs, our Chief Operating Officer, and David Sweatt, andA. Bright, our First Vice President and Chief CreditFinancial Officer Gary L. Brown (each an “Employment Agreement” and collectively, the “Employment Agreements”). A brief description of the terms and conditions of the Employment Agreements follows. Unless defined herein, capitalized terms shall have the meaning given them in the Employment Agreements.

Mr. Plemens’ Employment Agreement provides for an initial annual base salary of $270,000$325,000 and for an initial term of employment of 3three years. Upon the thirdfirst anniversary of Mr. Plemens’ Employment Agreement and each subsequent anniversary thereof, it shallwill be automatically extended, if not earlier terminated, for a period of one year unless written notice from us or Mr. Plemens is provided at least 90 days prior to the expiration of the then existingremaining term stating that the term of employment under the Employment Agreement shallwill not be further extended. The Employment Agreements for Messrs. SweattScaggs and BrownBright provide for an initial base salary of $225,000$185,000 and $165,000,$180,000, respectively, and an initiala term of employment of two years.30 months and 24 months, respectively. Each Employment Agreement provides that the base salary shallwill be reviewed by the Board of Directors not less often than annually.

Messrs. Plemens, SweattScaggs and BrownBright will be entitled to participate in our (1)(i) executive management incentive plans, (2) long-term incentive plans; and (3)(ii) stock option, stock grant, management stock right recognition and similar plans, and in each of the foregoing cases any successor or substitute plans, and on at least as favorable a basis as any participant who is a member of our senior executive management.plans. In addition, Messrs. Plemens, SweattScaggs and BrownBright will be entitled to participate in all savings, deferred compensation, pension and retirement plans (including supplemental retirement plans), practices, policies and programs applicable generally to our senior executive employees, on at least as favorable a basis as any other participant who is a member of our senior executive management.employees.

Messrs. Plemens, SweattScaggs and BrownBright and their families, as the case may be, shallwill be eligible for participation in and shallwill receive all benefits under all of our welfare benefit plans, practices, policies and programs (including, without limitation, medical, hospitalization, prescription, dental, disability, employee life, group life, accidental death and dismemberment, and travel accident insurance plans and programs) to the extent applicable generally to our senior executive employees. Each of Messrs. Plemens, SweattScaggs and Brown shallBright will be entitled to receive prompt reimbursement for all reasonable expenses incurred by him in accordance with our policies, practices and procedures, to the extent applicable generally to members of our senior executive employees.management. In addition, each of Messrs. Plemens, SweattScaggs and Brown shallBright will be entitled to fringe benefits in accordance with our plans, practices, programs and policies in effect for our senior executive employees, including, but not limited to, paid vacation, disability, sick and other leave specified in our employment policies.

Messrs. Plemens’, Sweatt’sScaggs’ and Brown’sBright’s employment with us shallwill terminate automatically upon his death. Otherwise, we may terminate their employment for Cause, Without Cause (subject to certain payments and vested rights) and/or if we determine in good faith that a Disability has occurred, after notice of such determination. Also, each of Messrs. Plemens, SweattScaggs and BrownBright may terminate his employment voluntarily or for Good Reason (subject to certain payments and vested rights).

In the event Mr. Plemens is terminated in connection with a “Change in Control” (defined below), either 90 days prior to, or within 12 months following, Mr. Plemens ishe will be entitled to receive a severance payment in an amount equal to two hundred and ninety-nine percent (299%)2.99 times his “base amount”average annual compensation as defined incalculated for purposes of Section 280G(b)(3)280G of the Code. The severance payment will be paid in six semi-annual installments. In addition, Mr. Plemens is entitled to receive, for a period of threeup to two years following the termination, certain medical benefits for him and/or his family at least equal to those which would have been provided to him and/or his family if Mr. Plemens’his employment had not been terminated. The Employment Agreements for Messrs. Sweatt and Brown provide that in

In the event heeither Mr. Scaggs or Mr. Bright is terminated in connection with a “Change ofin Control” (as defined below), either 90 days prior to, or within 12 months following, he iswill be entitled to receive a severance payment in an amount equal to 2.5 times and 2.0 times, respectively, his average annual compensation as calculated for purposes of Section 280G of the amount that he would have beenCode. Any such severance payment will be paid to Mr. Scaggs in five semi-annual installments, and to Mr. Bright in four semi-annual payments. In addition, Messrs. Scaggs and Bright will each be entitled to receive, during the remainderfor a period of his employment period but for the termination. In addition, for the remainder of the employment period, each of Messrs. Sweatt and Brown shall be entitledup to receiveone year following termination, certain medical benefits for him and/or his family at least equal to those which would have been provided to him and/or his family if Messrs. Sweat’s or Brown’shis employment had not been terminated.

For purposes of the Employment Agreements a “Change in Control” means (i)will occur on the date (i) either (A) a person acquires (or has acquired during the preceding 12 months) ownership of our stock possessing 30% or more of the total voting power of our common stock, or (B) a majority of our Board of Directors is replaced during any 12-month period by directors whose election is not endorsed by a majority of the members of our Board of Directors prior to such election; (ii) the date a person acquires (or has acquired during the preceding 12 months) our assets that have a total gross fair market value that is equal to or exceeds 40% of the total gross fair market value of all our assets immediately prior to such acquisition; or (iii) the date a person acquires ownership of our common stock that, together with common stock previously held, constitutes more than 50% of the total fair market value or total voting power of our common stock, provided that such person did not previously own 50% or more of the value or voting power of our common stock. The Employment Agreements could have the effect of making it less likely that we will be acquired by another entity.

Each Employment Agreement also restricts Messrs. Plemens, SweattScaggs and BrownBright from competing against us, or soliciting our customers or employees, for a certain amountperiod of time following a termination of employment.

Severance and Non-Competition Agreement.Upon completion of the conversion, we will enter into severance and non-competition agreements with Carolyn H. Huscusson, our Chief Retail Officer, Ryan M. Scaggs,Bobby D. Sanders, II, our Chief FinancialCredit Administration Officer, Laura W. Clark, our Chief Risk Officer, and Marcia J. Ringle our Corporate Secretary and Anthony Cataldi, our Chief Operations Officer (each a “Severance Agreement” and collectively, the “Severance Agreements”). The Severance Agreements are agreements of severance benefits, payable in certain circumstances and not agreements of employment for any period of time. Each Severance Agreement will provide for the payment of severance payments to be paid to the executive if we terminate the executive without Cause or if the executive terminates employment for Good Reason (as defined in the Severance Agreement). In exchange, each Severance Agreement will restrict the executive from competing against us, or soliciting our customers or employees, for a certain amountperiod of time following a termination of employment.

Other Benefits.Stock-based Benefit Plans. At this time, we do notWe intend to adopt one or implement anymore stock-based incentivebenefit plans after the conversion that will provide for our executive officersgrants of stock options and directors. Inrestricted common stock awards. Applicable regulations restrict the future, wetotal number of stock options and shares of restricted stock that may considerbe authorized during the adoptionfirst year following the conversion to 10% and 4%, respectively, of an employeethe shares issued in the offering. These limitations do not apply if plans are implemented more than one year after a conversion. We anticipate that the plans will authorize a number of stock ownership plan, a stock option planoptions and a number of shares of restricted stock, plan fornot to exceed 7% and 3%, respectively, of the benefit of directors, officers and employees. Any suchshares issued in the offering. These limitations will not apply if the plans are implemented more than one year after the conversion.

The stock-based benefit planplans will not be established sooner than 12six months after the conversion. Any stock option plan will requireIf we adopt the approvalplans within one year after the conversion, the plans must be approved by a majority of the total votes eligible to be cast by our shareholders. If we adopt the plans more than one year after the conversion, they must be approved only by a majority of the total votes cast.

Employee Stock Ownership Plan. InThe following restrictions would apply to our stock-based benefit plans only if the future, and following theplans are adopted within one year of completion of the conversion weand offering:

non-employee directors in the aggregate may consider the adoption of an Employee Stock Ownership Plan for our employees, subject to approval by our shareholders.

Stock Option Plan. In the future, and following the completionnot receive more than 30% of the conversion, we may consider the adoption of a stock option plan for our directors, officers and employees, subject to the approval by our shareholders. Any stock option plan adopted will authorize a committee of non-employee directors or the full Board. The committee or the Board will decide which directors, officers and employees will receive options and restricted stock awards authorized under the terms of those options. No stock option will permit its recipient to purchase shares at a price that is lessplans;

any non-employee director may not receive more than the fair market value of a share on the date the option is granted, and no option will have a term that is longer than ten years. We may obtain the shares needed for this plan by issuing additional shares or through stock repurchases.

Restricted Stock Plan. In the future, and following the completion5% of the conversion, we may consider the adoption of aoptions and restricted stock plan for our directors, officersawards authorized under the plans;

any officer or employee may not receive more than 25% of the options and employees, subject to the approval by our shareholders. Any restricted stock option plan adopted will establish a committee of non-employee directors orawards authorized under the full Board of Directors. The committee or plans;

the Board of Directors will decide which directors, officersoptions and employees will receive restricted stock awards may not begin to vest earlier than one year after shareholders approve the plans, and may not vest more rapidly than 20% per year;

accelerated vesting is not permitted except for death, disability or upon a change in control of Entegra; and

executive officers or directors must exercise or forfeit their options in the terms of those awards. We may obtainevent the shares needed for this plan by issuing additional shares or through stock repurchases.

Restricted stock awards under this plan may feature employment restrictions that require continued employment for a period of time for the award to be vested. Awards would not be vested unless the specified employment restrictions are met. However, pending vesting, the award recipient may have voting and dividend rights. Executive officers and directors would be required to forfeit the unvested portion of their restricted stock if the Bankinstitution becomes critically undercapitalized, is subject to enforcement action by the Federal Reserve, or receives a capital directive.

These restrictions do not apply to plans adopted one year following completion of the conversion and the offering. In the event of changes in applicable regulations or policies regarding stock-based incentive plans, including any regulations or policies restricting the size of awards and vesting of benefits as described above, the restrictions described above may not be applicable.

We may obtain the shares needed for our stock-based benefit plans by issuing additional shares of common stock from authorized but unissued shares or through stock repurchases, subject to bank regulatory restrictions.

Certain Relationships and Related Transactions

Certain directors and executive officers of Bancorp and the Bank, companies with which directors, and executive officers are associated, and/or the immediate family members of directors and executive officers of Bancorp and the Bank are customers of the Bank and as such may from time to time borrow funds from the Bank within prescribed limitations. Any such loans and commitments are made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons not related to Bancorp or the Bank, and do not involve more than the normal risk of collectability or present to the Bank other unfavorable features.

Jim M. Garner, a director of Bancorp and the Bank, owns 46% of Wayah Agency, Inc. (“Wayah”). Wayah provides insurance brokerage related services to the Bank. During the year ended December 31, 2010,2013, Wayah served as an insurance broker for the Bank’s property and casualty insurance and bond products as well as the Bank’s employee benefit products. The Bank paid Wayah $9,794$49,750 in commissions from thethese transactions. It is anticipated that Mr. Garner, through Wayah, will provide insurance brokerage services to the Bank from time to time during the year ended December 31, 2011.2014.

Fred H. Jones, a director of Bancorp and the Bank, is the President and one-third owner of Jones, Key, Melvin & Patton, P.A. (“Jones, Key”). Jones, Key provides legal services from time to time to the Bank. During the year ended December 31, 2010,2013, the Bank paid Jones, Key $11,974$4,916 in exchange for legal services. Of this amount, Mr. Jones received $3,991 by virtue of his ownership in Jones, Key. It is anticipated that Jones, Key will provide legal services to the Bank from time to time during the year ending December 31, 2011.

2014.

Indebtedness of and Transactions with Related Persons

The Bank provides loans and other credit facilities in the ordinary course of its business to members of our Board of Directors, members of the Bank Board, and employees, including executive officers, and businesses in which the foregoing have direct or indirect interests, as well as the immediate family of the foregoing (together, “Related Persons”). In accordance with Federal Reserve Regulation O, the Bank has adopted a policy which sets forth the requirements applicable to such loans and other credit facilities. These loans and other credit facilities are made using the same credit and underwriting standards as are applicable to the general public, and such loans and other credit facilities do not involve more than the normal risk of collectability or present other unfavorable features. Pursuant to this policy, outstanding loans and other credit facilities to Related Persons are made on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with nonaffiliated persons, and do not involve more than the normal risk of collectability or present to the Bank other unfavorable features.

Our Board of Directors is charged with reviewing and approving all transactions that either we or the Bank may have from time to time with Related Persons other than transactions subject to Federal Reserve Regulation O, discussed above. All material facts of each transaction and the Related Person’s interest are discussed by all disinterested directors and a decision is made about whether the transaction is fair to Bancorp and the Bank. A majority vote of all disinterested directors is required to approve any transaction involving a Related Person.

SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS

The following table sets forth information regarding intended common stock subscriptions by each of our directors and executive officers, and their associates, and by all directors and executive officers as a group. However, there can be no assurance that any individual director or executive officer, or the directors and executive officers as a group, will purchase any specific number of shares of our common stock. Directors and executive officers will purchase shares of common stock at the same $10.00 purchase price per share and on the same terms as other purchasers in the offering, except that certain additional restrictions on the resale or subsequent disposition of the shares shall apply. This table excludes any stock awards or stock option grants that may be made no earlier than six months after the completion of the conversion and the offering. The directors and officers have indicated their intention to subscribe in the offering for an aggregate of $1.5$2.2 million of shares of common stock, equal to 3.5%6.02% of the number of shares of common stock to be sold in the offering at the minimum of the offering range, assuming shares are available. Purchases by directors, executive officers and their associates will be included in determining whether the required minimum number of shares has been subscribed for in the offering. The shares being acquired by the directors, executive officers and their associates are being acquired for investment purposes, and not with a view towards resale.

   Number of
Shares
   Aggregate
Purchase Price
   Percent at
Minimum of
Offering Range
 

David Sweatt

   50,000    $500,000     1.18

Roger Plemens

   15,000    $150,000     0.35

Ronnie Beale

   5,000    $50,000     0.12

Gary Brown

   7,500    $75,000     0.18

Stan Jeffress

   11,500    $115,000     0.27

Marcia Ringle

   3,000    $30,000     0.07

Beverly Mason

   10,000    $100,000     0.24

Carolyn Huscusson

   7,500    $75,000     0.18

Adam Burrell

   2,000    $20,000     0.05

Ryan Scaggs

   7,500    $75,000     0.18

Jim Garner

   5,000    $50,000     0.12

Ed Shatley

   15,000    $150,000     0.35

Fred Jones

   9,500    $95,000     0.22
               

Total

   148,500    $1,485,000     3.49

   Number of
Shares
   Aggregate
Purchase Price ($)
   Percent at
Minimum of
Offering Range
(%)
 

Ronnie D. Beale

   5,000     50,000     0.14  

David A. Bright

   30,000     300,000     0.82  

Louis E. Buck, Jr.

   30,000     300,000     0.82  

Adam W. Burrell, MD

   5,000     50,000     0.14  

Laura W. Clark

   15,000     150,000     0.41  

Charles M. Edwards

   5,000     50,000     0.14  

Jim M. Garner

   10,000     100,000     0.27  

Carolyn H. Huscusson

   10,000     100,000     0.27  

Stan M. Jeffress

   40,000     400,000     1.09  

Fred H. Jones

   10,000     100,000     0.27  

Beverly W. Mason

   20,000     200,000     0.55  

Roger D. Plemens

   20,000     200,000     0.55  

Marcia J. Ringle

   3,000     30,000     0.08  

Bobby D. Sanders, II

   2,000     20,000     0.05  

Ryan M. Scaggs

   15,000     150,000     0.41  
  

 

 

   

 

 

   

 

 

 

Total

   220,000    $2,200,000     6.02

THE CONVERSION

Our Board of Directors has approved the plan of conversion. The plan of conversion must also be approved by the voting members of Bancorp. A special meeting of the voting members of Bancorp has been called for this purpose. The plan of conversion has been submitted to the Commissioner and the Federal Reserve as part of our application for approval to become a bank holding company and of the change in control of Bancorp and the Bank, and the merger of Bancorp into Macon FinancialEntegra that will occur in connection with the plan of conversion. Any such approvals do not constitute recommendations or endorsements of the plan of conversion by such agencies. The plan of conversion has also been submitted to the FDIC.

General

Pursuant to the plan of conversion, our organization will convert from a mutual form of organization to a stock form of organization. Bancorp, the mutual holding company parent of the Bank, will be merged into Macon Financial,Entegra, with Macon FinancialEntegra as the surviving entity, and the Bank will become a wholly-owned subsidiary of Macon Financial.Entegra. As part of the conversion, Macon FinancialEntegra is offering for sale shares of its common stock. When the conversion and offering are completed, all of the outstanding common stock of the Bank will be owned by Macon Financial,Entegra, and all of the outstanding common stock of Macon FinancialEntegra will be owned by public shareholders.

We intend to retain at least 10%15% of the net proceeds at the holding company and contribute the balance to Bank. The conversion will be consummated only upon the issuance of at least the minimum number of shares of our common stock offered pursuant to the plan of conversion.

The plan of conversion provides that we will offer shares of common stock in a “subscription offering” in the following descending order of priority:

 

First, to eligible depositors of the Bank with aggregate account balances of at least $100.00 as of the close of business on December 31, 2009.

2012.

 

Second, to the Bank’sour tax-qualified employee benefit plans, (if any),if any, which will receive, without payment therefor, nontransferable subscription rights to purchase in the aggregate up to 10% of the shares of common stock sold in the offering.We do not have any plans to establish an employee stock ownership plan to purchase any shares in the offering.

 

Third, to eligible depositors of the Bank with aggregate account balances of at least $100.00 as of the close of business on [supplemental eligibility date].

 

Fourth, to other eligible depositors and borrowers of the Bank as of the close of business on[Voting Record Date for Special Meeting].

Shares of common stock not purchased in the subscription offering may be offered for sale in a “community offering” to members of the general public, with a preference given to natural persons residing in Buncombe, Clay, Cherokee, Graham, Haywood, Henderson, Jackson, Macon, Polk, Swain and Transylvania Counties, North Carolina, and Rabun County, Georgia. See “– Community Offering” on page.

The shares of common stock not purchased in the subscription offering or community offering may be offered to the general public on a best efforts basis in a “syndicated offering” to be managed by Raymond James & Associates, Inc.Sandler O’Neill. In such capacity, Raymond James & Associates, Inc.Sandler O’Neill may form a syndicate of other broker-dealers. See “– Syndicated Offering” on page.

We have the right to accept or reject orders received in a community offering or syndicated offering at our sole discretion. The community offering and/or syndicated offering may begin simultaneously with, or later than the commencement of the subscription offering. The issuance of shares of common stock in the subscription offering, and any community offering and syndicated offering will occur simultaneously.

We determined the number of shares of common stock to be offered for sale based upon an independent valuation of the estimated pro forma market value of Macon FinancialEntegra upon completion of the conversion and the offering. All shares of common stock to be sold in the offering will be sold at $10.00 per share. Investors will not be charged a commission to purchase shares of common stock in the offering. The independent valuation will be

updated and the final number of the shares of common stock to be issued in the offering will be determined at the completion of the offering. See “– Share Pricing and Number of Shares to be Issued” on pagefor more information as to the determination of the estimated pro forma market value of the common stock.

The following is a brief summary of the conversion and is qualified in its entirety by reference to the provisions of the plan of conversion. A copy of the plan of conversion is available for inspection at each banking office of the Bank. The plan of conversion is part of the applications for approval ofto become a bank holding company, the change in control of Bancorp and the Bank and the merger of Bancorp into Macon FinancialEntegra filed with the Federal Reserve and the Commissioner, and is included as an exhibit to our Registration Statement on Form S-1, which is accessible on the SEC’s website, www.sec.gov. See “Where You Can Find Additional Information” on page.

Reasons for the Conversion

We have developed an operating strategy to:

 

address our current challenges,

Pursue Opportunities in Existing Markets;

 

restore the Bank to profitability,

Diversify Geography and Product Mix and Explore Growth Opportunities;

 

increase the Bank’s focus on small businessContinue to Improve Asset Quality; and private banking customers, and

 

explore growth opportunities.

Improve Profitability.

We need a significant amount of capital to execute these strategies,this strategy, and we cannot raise this level of capital as a mutual financial institution. We believe that the conversion and the additional capital raised in the offering will enable us to pursue this strategy, and take advantage of business opportunities that may not otherwise be available to us. As a fully converted stock holding company, we will have greater flexibility in structuring mergers and acquisitions, including the form of consideration that we can use to pay for an acquisition. We currently have no ability to issue common stock and potential sellers often want stock for at least part of the purchase price. Our new stock holding company structure will enable us to offer stock or cash consideration, or a combination of stock and cash, and will therefore enhance our ability to compete with other bidders when acquisition opportunities arise. We have no current arrangements or agreements with respect to any such acquisitions.

Approvals Required

The affirmative vote of a majority of the total eligible votes of Bancorp’s voting members at the special meeting of voting members is required to approve the plan of conversion. A special meeting of voting members to consider and vote upon the plan of conversion has been scheduled for [meeting date].

The Commissioner and the Federal Reserve must each also approve Entegra’s application to become a bank holding company, the change in control of Bancorp and the Bank and the merger of Bancorp into Macon FinancialEntegra that will occur in connection with the plan of conversion. Such approvals do not constitute recommendations or endorsements of the plan of conversion by such agencies. The plan of conversion has also been submitted to the FDIC.

Effects of Conversion on Customers of the Bank

Continuity.Our normal business of accepting deposits and making loans will continue without interruption during the offering. The Bank will continue to be a North Carolina chartered savings bank and will continue to be regulated by the Commissioner and the FDIC. After the conversion, we will continue to offer existing services to depositors, borrowers and other customers. Our directors at the time of the conversion will continue to be the directors of Macon FinancialEntegra and the Bank after the conversion.

Effect on Deposit Accounts.Pursuant to the plan of conversion, each depositor of the Bank at the time of the conversion will automatically continue as a depositor after the conversion, and the deposit balance, interest rate and other terms of such deposit accounts will not change as a result of the conversion. Each such account will be insured by the FDIC to the same extent as before the conversion. Depositors will continue to hold their existing certificates and other evidences of their accounts.

Effect on Loans.No loan outstanding from the Bank will be affected by the conversion, and the amount, interest rate, maturity and security for each loan will remain as it was contractually fixed prior to the conversion.

Effect on Voting Rights of Members.At present, the Bank’s depositors and borrowers have voting rights in Bancorp. Upon completion of the conversion, Macon Financial’sEntegra’s shareholders will possess exclusive voting rights with respect to Macon Financial.

Entegra.

Tax Effects.We will receive an opinion of counsel with regard to federal and state income tax consequences of the conversion to the effect that the conversion will not be taxable for federal or state income tax purposes to Macon Financial,Entegra, Bancorp, the Bank or the depositors of the Bank. See “–“The Conversion – Material Income Tax Consequences” on page.

Effect on Liquidation Rights.Each depositor in the Bank has both a deposit account in the Bank and a pro rata ownership interest in the net worth of Bancorp based upon the deposit balance in his or her account. This ownership interest is tied to the depositor’s account and has no tangible market value separate from the deposit account. This interest may only be realized in the event of a complete liquidation of Bancorp and the Bank, or a liquidation solely of the Bank. Any depositor who opens a deposit account obtains a pro rata ownership interest in Bancorp without any additional payment beyond the amount of the deposit. A depositor who reduces or closes his or her account receives a portion or all of the balance in the deposit account, but nothing for his or her ownership interest in our net worth, which is lost to the extent that the balance in the account is reduced or closed.

Consequently, depositors in a stock subsidiary of a mutual holding company normally have no way of realizing the value of their ownership interest, which has realizable value only in the unlikely event that Bancorp and the Bank are liquidated. If this occurs, the depositors of record at that time, as owners, would share pro rata in any residual surplus and reserves of Bancorp after other claims, including claims of depositors to the amounts of their deposits are paid, and the claims of holders of our subordinated debt.

Under the plan of conversion, however, Eligible Account Holders and Supplemental Eligible Account Holders (hereafter defined) will receive rights in liquidation accounts maintained by Macon FinancialEntegra and the Bank representing the total equity of Bancorp as reflected in its latest statement of Consolidated Financial Condition contained in this prospectus and used in the offering. Macon FinancialEntegra and the Bank shall continue to hold the liquidation accounts for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders who continue to maintain deposits in the Bank. The liquidation accounts are also designed to provide payments to depositors of their liquidation interests in the event of Macon Financial’sEntegra’s liquidation and the liquidation of the Bank, or a liquidation solely of the Bank. The liquidation account in the Bank would be used only in the event that Macon FinancialEntegra does not have sufficient capital to fund its obligation under its liquidation account. The total obligation of Macon FinancialEntegra and the Bank under their respective liquidation accounts will never exceed the dollar amount of Macon Financial’sEntegra’s liquidation account. A post-conversion merger, consolidation, or similar combination with another depository institution, in which either Macon FinancialEntegra and/or the Bank are not the surviving entity would not be considered a liquidation and, in such a transaction, the liquidation account would be assumed by the surviving holding company or institution. See “– Liquidation Rights” on page.

Share Pricing and Number of Shares to be Issued

The plan of conversion requiresand federal and state regulations require that the aggregate purchase price of the common stock sold in the offering be based on the appraised pro forma market value of the common stock, as determined by an independent valuation. We have retained RP Financial to prepare an independent valuation appraisal. For its services in preparing the initial valuation, RP Financial will receive a fee of $60,000 and will be reimbursed for its expenses. RP Financial will receive an additional fee of $10,000 for each update to the valuation appraisal. We have agreed to indemnify RP Financial and its employees and affiliates against specified losses, including any losses in connection with claims under the federal securities laws, arising out of its services as independent appraiser, except where such liability results from its negligence or bad faith.

The independent valuation appraisal considered the pro forma impact of the offering. Consistent with applicable appraisal guidelines, the appraisal applied three primary methodologies: the pro forma price-to-book value approach applied to both reported book value and tangible book value; the pro forma price-to-earnings approach applied to reported and core earnings; and the pro forma price-to-assets approach. Based on RP Financial’s belief that asset size is not a strong determinant of market value, RP Financial did not place significant weight on the pro forma price-to-assets approach in reaching its conclusions. Since Bancorp’s price-to-earning multiples were not meaningful due to its negative pro forma earnings, RP Financial placed the greatest emphasis on the price-to-book approachesvalue approach in estimating pro forma market value.value, but also considered the price-to-assets approach. The market value ratios applied in the three methodologies were based upon the current market valuations of the peer group companies identified by RP Financial, subject to valuation adjustments applied by RP Financial to account for differences between us and the peer group. Downward adjustments were applied in the valuation for financial condition and profitability, growth and viability of earnings, ourasset growth, primary market area, capacity to pay dividends, marketing of the common stock and the effect of government regulations and regulatory reform. No adjustment wasadjustments were applied in the valuation for liquidity of the common stock.shares, marketing of the issue, and management. The downward valuation adjustments considered, among other factors, less favorable asset quality, weaker earnings, the Bank MOU,Consent Order, the Bancorp MOUWritten Agreement and our primary market area (lower per capita income and higher unemployment) versus the peer group and the valuation considerations applied by potential investors in purchasing a newly issued stock that has no prior trading history in a volatile market for thrift and savings bank common stock.group.

The independent valuation was prepared by RP Financial in reliance upon the information contained in this prospectus, including our Consolidated Financial Statements. RP Financial also considered the following factors, among others:

 

our present and projectedrecent results and financial condition;

 

the economic and demographic conditions in our existing market areas;

area;

 

certain historical, financial and other information relating to us;

 

a comparative evaluation of our operating and financial characteristics with those of other similarly situated publicly traded savings institutions;

 

the aggregate size of the offering;

the impact of the conversion and the offering on our equity and earnings potential;

 

our potential to pay cash dividends; and

 

the trading market for securities of comparable institutions and general conditions in the market for such securities.

Included in the independent valuation were certain assumptions as to our pro forma earnings after the conversion that were utilized in determining the appraised value. These assumptions included estimated expenses and an assumed after-tax rate of return of 1.36%1.23% on the net offering proceeds. See “Pro Forma Data” on pagefor additional information concerning these assumptions. The use of different assumptions may yield different results.

The independent valuation states that as of May 13, 2011,February 14, 2014, our estimated pro forma market value ranged from $42.5$36.6 million to $57.5$49.5 million, with a midpoint of $50.0$43.0 million, subject to an adjusted maximum of $56.9 million. Our Board of Directors decided to offer the shares of common stock for a price of $10.00 per share primarily because it is the price most commonly used in mutual-to-stock conversions of financial institutions. The number of shares offered will be equal to the aggregate offering price of the shares divided by the price per share. Based on the valuation range and the $10.00 price per share, the minimum of the offering range will be 4,250,0003,655,000 shares, the midpoint of the offering range will be 5,000,0004,300,000 shares and the maximum of the offering range will be 5,750,0004,945,000 shares, or 6,612,5005,686,750 shares if the maximum amount is adjusted to reflect regulatory considerations, changes in market and financial conditions, and/or demand for the common stock.

In selecting a peer group from all publicly-traded fully-converted saving institutions, RP Financial applied the following selection criteria in the appraisal: publicly-traded fully-converted savings institutions based in either the Southeast or Midwest regions of the U.S., with assets between $400 million and $2.0 billion, NPAs to assets between 2.0% and 10.0% and core earnings of between -1.0% and 1.0% of average assets. For purposes of RP Financial’s appraisal report, core earnings are generally defined as reported earnings adjusted for non-operating items.

The appraisal peer group consists of the following 10 companies, with the asset sizes as of MarchDecember 31, 2011,2013, unless otherwise stated.noted.

 

Company Name and Ticker Symbol

  

Exchange

  

Headquarters

  Total Assets 
         (in millions) 

CFS Bancorp, Inc. (CITZ)

  NASDAQ  Munster, IN  $1,122(1) 

Community Financial Corp. (CFFC)

  NASDAQ  Staunton, VA  $528(1) 

First Clover Leaf Financial Corp. (FCLF)

  NASDAQ  Edwardsville, IL  $575(1) 

First Defiance Financial Corp. (FDEF)

  NASDAQ  Defiance, OH  $2,062  

First Savings Financial Group, Inc. (FSFG)

  NASDAQ  Clarksville, IN  $513  

HF Financial Corp. (HFFC)

  NASDAQ  Sioux Falls, SD  $1,207  

Home Bancorp, Inc (HBCP)

  NASDAQ  Lafayette, LA  $700  

HopFed Bancorp, Inc. (HFBC)

  NASDAQ  Hopkinsville, KY  $1,083(1) 

MutualFirst Financial Inc. (MFSF)

  NASDAQ  Muncie, IN  $1,407(1) 

Pulaski Financial Corp. (PULB)

  NASDAQ  St. Louis, MO  $1,338  

Teche Holding Company (TSH)

  NASDAQ  New Iberia, LA  $754(1) 

Company Name and Ticker Symbol

  Exchange  

Headquarters

  Total
Assets
 
         (in millions) 

United Community Financial Corp. (UCFC)

  NASDAQ  Youngstown, OH  $1,756 (1) 

HomeTrust Bancshares Inc. (HTBI)

  NASDAQ  Asheville, NC  $1,629  

Pulaski Financial Corp. (PULB)

  NASDAQ  Saint Louis, MO  $1,294  

Franklin Financial Corp. (FRNK)

  NASDAQ  Glen Allen, VA  $1,075  

ASB Bancorp Inc (ASBB)

  NASDAQ  Asheville, NC  $733  

First Savings Financial Group (FSFG)

  NASDAQ  Clarksville, IN  $687  

First Clover Leaf Financial Corp. (FCLF)

  NASDAQ  Edwardsville, IL  $647 (1) 

Cheviot Financial (CHEV)

  NASDAQ  Cheviot, OH  $587  

United Community Bancorp (UCBA)

  NASDAQ  Lawrenceburg, IN  $512  

Wayne Savings Bancshares (WAYN)

  NASDAQ  Wooster, OH  $410  

 

(1) 

Figures as of December 31, 2010.

September 30, 2013.

The following table presents a summary of selected pricing ratios for the peer group companies and BancorpEntegra (on a pro forma basis). The pricing ratios and the peer group companies identified by RP Financial, LC. Ratios for the peer group are based on earningsequity and other informationearnings as of andor for the threetwelve months ended MarchDecember 31, 2011,2013 (or the last twelve months for which data are available) and stock price information as of May 13, 2011,February 14, 2014. Ratios for Entegra are based on equity as reflected in RP Financial’s appraisal report, dated May 13, 2011,of December 31, 2013 and net income for the number of shares outstanding as described in “Pro Forma Data.” Compared to the average pricing of the peer group, our pro forma pricing ratios at the maximum of the offering range indicated a discount of 29.7% on a price-to-book value basis and a discount of 31.7% on a price-to-tangible book value basis.year ended December 31, 2013. Compared to the median pricing of the peer group, our pro forma pricing ratios at the maximum of the offering range indicated a discount of 38.0%27.4% on a price-to-book value basis and a discount of 24.5%31.9% on a price-to-tangible book value basis.

This means that, at the maximum of the offering range, a share of our common stock would be less expensive than the peer group on a book value and tangible book value basis.

  

Price-to-Earnings

Multiple

 

Price to

Book Value

 

Price to Tangible

Book Value

   Price-to-Earnings
Multiple
 Price to
Book Value
 Price to Tangible
Book Value
 

Macon Financial (pro forma):

    

Entegra (pro forma):

    

Maximum, as adjusted, of offering range

   NM  55.62  55.62   NM 66.14 66.14

Maximum of offering range

   NM  52.00    52.00     NM 62.70   62.70  

Midpoint of offering range

   NM  48.33    48.33     NM 59.17   59.17  

Minimum of offering range

   NM  44.21    44.21     NM 54.95   54.95  

Peer group companies:

        

Average

   14.29  70.01    76.14     20.23   88.13 93.57

Median

   12.07  68.85    83.84     18.24   86.30   92.06  

 

*

Not meaningful

Our Board of Directors reviewed the independent valuation and, in particular, considered the following:

 

our financial condition and results of operations;

 

comparison of our financial performance ratios to those of other financial institutions of similar size; and

 

market or financial conditions generally and, in particular, for financial institutions.

All of these factors are set forth in the independent valuation. Our Board of Directors also reviewed the methodology and the assumptions used by RP Financial in preparing the independent valuation and believes that such assumptions were reasonable. The offering range may be amended if required as a result of subsequent developments in our financial condition or market conditions generally. In the event the independent valuation is updated to amend our pro forma market value to less than $42.5$36.6 million or more than $66.1$56.9 million, the appraisal will be filed with the SEC by a post-effective amendment to our registration statement.

The independent valuation is not intended, and must not be construed, as a recommendation of any kind as to the advisability of purchasing shares of our common stock. RP Financial did not independently verify our Consolidated Financial Statements and other information that we provided to them, nor did RP Financial independently value our assets or liabilities. The independent valuation considers us as a going concern and should not be considered as an indication of the liquidation value of us or the Bank. Moreover, because the valuation is necessarily based upon estimates and projections of a number of matters, all of which may change from time to time, no assurance can be given that persons purchasing our common stock in the offering will thereafter be able to sell their shares at prices at or above the $10.00 offering price per share.

Following commencement of the subscription offering, the maximum of the valuation range may be increased by up to 15%, or up to $66.1$56.9 million, without resoliciting subscribers, which would result in a corresponding increase of up to 15% in the maximum of the offering range to up to 6,612,5005,686,750 shares, to reflect regulatory considerations, changes in market and financial conditions, and/or demand for the common stock. We will not decrease the minimum of the valuation range below $42.5$36.6 million or increase the range above $66.1$56.9 million without a resolicitation of subscribers. The subscription price of $10.00 per share will remain fixed. See “– Limitations on Common Stock Purchases” on pageas to the method of distribution and allocation of additional shares that may be issued in the event of an increase in the offering range.

If the update to the independent valuation at the conclusion of the offering results in an increase in the maximum of the valuation range to more than $66.1$56.9 million or a decrease in the minimum of the valuation range to less than $42.5$36.6 million, then we may terminate the offering and promptly return, with interest calculated at the Bank’s tier 1 statement savings rate, all funds previously delivered to us to purchase shares of common stock and cancel deposit account withdrawal authorizations. Alternatively, we may establish a new offering range, extend the offering period and commence a resolicitation of purchasers or take other actions as permitted or not prohibited by the Federal Reserve and the Commissioner in order to complete the offering.

In the event that we extend the offering and conduct a resolicitation, we will notify subscribers of the extension of time and of the rights of subscribers to maintain, change or cancel their stock orders within a specified period. If a subscriber does not respond during the period, his or her stock order will be canceled and payment will be returned promptly, with interest calculated at the Bank’s tier 1 statement savings rate, and deposit account withdrawal authorizations will be canceled.

An increase in the number of shares to be issued in the offering would decrease a subscriber’s ownership interest and our pro forma shareholders’ equity on a per share basis while increasing pro forma shareholders’ equity on an aggregate basis. A decrease in the number of shares to be issued in the offering would increase both a subscriber’s ownership interest

and our pro forma shareholders’ equity on a per share basis, while decreasing pro forma shareholders’ equity on an aggregate basis. For a presentation of the effects of these changes, see “Pro Forma Data” on page.

Copies of the independent valuation appraisal report of RP Financial and the detailed memorandum setting forth the method and assumptions used in the appraisal report are available for inspection at our executive office and as specified under “Where You Can Find Additional Information” beginning on page.

Subscription Offering and Subscription Rights

In accordance with the plan of conversion, rights to subscribe for shares of common stock in the subscription offering have been granted in the following descending order of priority. The filling of subscriptions that we receive will depend on the availability of common stock after satisfaction of all subscriptions of all persons having prior rights in the subscription offering and to the maximum, minimum and overall purchase limitations set forth in the plan of conversion and as described below under “– Limitations on Common Stock Purchases” beginning on page. Natural persons not 12 years of age, or older, as of, may not participate in the subscription offering.

Priority 1: Eligible Account Holders.Each depositor with aggregate deposit account balances of $100.00 or more (a “Qualifying Deposit”) on December 31, 20092012 (an “Eligible Account Holder”) will receive, without payment therefor, nontransferable subscription rights to purchase, subject to the overall purchase limitations, up to the greater of 75,00030,000 shares of common stock, 0.10% of the total number of shares of common stock sold in the offering, or 15 times the number of subscription shares offered multiplied by a fraction of which the numerator is the aggregate Qualifying Deposit account balances of the Eligible Account Holder and the denominator is the aggregate Qualifying Deposit account balances of all Eligible Account Holders, subject to the overall purchase limitations. See   “– Limitations on Common Stock Purchases” on page. If there are not sufficient shares available to satisfy all subscriptions, shares will first be allocated so as to permit each Eligible Account Holder to purchase a number of shares sufficient to make his or her total allocation equal to the lesser of 100 shares or the number of shares for which he or she subscribed. Thereafter, unallocated shares will be allocated to each Eligible Account Holder whose subscription remains unfilled in the proportion that the amount of his or her Qualifying Deposit bears to the total amount of Qualifying Deposits of all subscribing Eligible Account Holders whose subscriptions remain unfilled. If an amount so allocated exceeds the amount subscribed for by any one or more Eligible Account Holders, the excess shall be reallocated (one or more times as necessary) among those Eligible Account Holders whose subscriptions are not fully satisfied until all available shares have been allocated.

To ensure proper allocation of shares of our common stock, each Eligible Account Holder must list on his or her stock order form all deposit accounts in which he or she has an ownership interest on December 31, 2009.2012. In the event of oversubscription, failure to list an account could result in fewer shares being allocated than if all

accounts had been disclosed. In the event of an oversubscription, the subscription rights of Eligible Account Holders who are also our directors or executive officers and their associates will be subordinated to the subscription rights of other Eligible Account Holders to the extent attributable to increased deposits during the year preceding [December 31, 2012].

Priority 2: Supplemental Eligible Account Holders.To the extent that there are sufficient shares of common stock remaining after satisfaction of subscriptions by Eligible Account Holders, each depositor with a Qualifying Deposit on [supplemental eligibility date] who is not an Eligible Account Holder (“Supplemental Eligible Account Holder”) will receive, without payment therefor, nontransferable subscription rights to purchase up to the greater of 75,00030,000 shares of common stock, 0.10% of the total number of shares of common stock sold in the offering, or 15 times the number of subscription shares offered multiplied by a fraction of which the numerator is the Qualifying Deposit of the Supplemental Eligible Account Holder and the denominator is the aggregate Qualifying Deposits of all Supplemental Eligible Account Holders, subject to the overall purchase limitations. See “– Limitations on Common Stock Purchases” on page. If there are not sufficient shares available to satisfy all subscriptions, shares will be allocated so as to permit each Supplemental Eligible Account Holder to purchase a number of shares sufficient to make his or her total allocation equal to the lesser of 100 shares of common stock or the number of shares for which he, she or it subscribed. Thereafter, unallocated shares will be allocated to each Supplemental Eligible Account Holder whose subscription remains unfilled in the proportion that the amount of his, her or its Qualifying Deposit bears to the total amount of Qualifying Deposits of all Supplemental Eligible Account Holders whose subscriptions remain unfilled. If an amount so allocated exceeds the amount subscribed for by any one or more Supplemental Eligible Account Holders, the excess shall be reallocated (one or more times as necessary) among those Supplemental Eligible Account Holders whose subscriptions are not fully satisfied until all available shares have been allocated.

To ensure proper allocation of common stock, each Supplemental Eligible Account Holder must list on the stock order form all deposit accounts in which he, she or it has an ownership interest at [supplemental eligibility date]. In the event

of oversubscription, failure to list an account could result in fewer shares being allocated than if all accounts had been disclosed.

Priority 3: Other Depositors and Other Members.To the extent that there are shares of common stock remaining after satisfaction of subscriptions by Eligible Account Holders and Supplemental Eligible Account Holders, each depositor and/or borrower as of [meeting record date] who is not an Eligible Account Holder or Supplemental Eligible Account Holder (“Other Depositors and Other Members”) will receive, without payment therefor, nontransferable subscription rights to purchase up to the greater of 75,00030,000 shares of common stock, or 0.10% of the total number of shares of common stock sold in the offering, subject to the overall purchase limitations. See “– Limitations on Common Stock Purchases” on page. If there are not sufficient shares available to satisfy all subscriptions, available shares will be allocated so as to permit each Other Depositor and Other Member to purchase a number of shares sufficient to make his, her or its total allocation equal to the lesser of 100 shares of common stock or the number of shares for which he, she or it subscribed. Thereafter, unallocated shares will be allocated to Other Depositors and Other Members whose subscriptions remain unfilled in the proportion that the amount of the subscription of each Other Depositor and Other Member bears to the total amount of subscriptions of all Other Depositors and Other Members whose subscriptions remain unfilled. To ensure proper allocation of common stock, each Other Depositor and Other Member must list on

the stock order form all loans he or she has with the Bank and all deposit accounts in which he or she had an ownership interest at [meeting record date]. In the event of an oversubscription, failure to list an account or loan could result in fewer shares being allocated than if all accounts and loans had been disclosed.

Expiration Date. The subscription offering will expire at 2:4:00 p.m., Eastern Daylight Time, on [expiration date], unless extended by us. Subscription rights will expire whether or not each eligible depositor and eligible borrower can be located. We may decide to extend the expiration date of the subscription offering for any reason, whether or not subscriptions have been received for shares at the minimum, midpoint or maximum of the offering range. Subscription rights that have not been exercised prior to the expiration date will become void.

We will not execute orders until we have received orders to purchase at least the minimum number of shares of common stock. If we have not received orders to purchase at least 3,655,000 shares prior to [expiration date] and we have not otherwise extended the offering, all funds delivered to us to purchase shares of common stock in the offering will be returned promptly to the subscribers with interest calculated at our tier 1 statement savings rate, and all deposit account withdrawal authorizations will be canceled. We may decide to extend the subscription offering for any reason and are not required to give purchasers notice of any such extension. Extensions may not go beyond [final expiration date], which is two years after the special meeting of voting members to vote on the conversion.

Community Offering

To the extent that shares of common stock remain available for purchase after satisfaction of all subscriptions of the Eligible Account Holders, the Supplemental Eligible Account Holders and Other Depositors and Other Members, we may offer shares pursuant to the plan of conversion to certain members of the general public, with a preference given to natural persons residing in Buncombe, Clay, Cherokee, Graham, Haywood, Henderson, Jackson, Macon, Polk, Swain and Transylvania Counties, North Carolina, and Rabun County, Georgia,i.e., a community offering.

Persons who place orders in the community offering may purchase up to 75,00030,000 shares of common stock, subject to the overall purchase limitations. See “– Limitations on Common Stock Purchases” on page. We will use our best efforts consistent with the plan of conversion to distribute the common stock sold in the community offering in such a manner as to promote the widest distribution practicable.The opportunity to purchase shares of common stock in the community offering category is subject to our right, in our sole discretion, to accept or reject any such orders in whole or in part either at the time of receipt of an order or as soon as practicable following the expiration date of the offering.We have not established any set criteria for determining whether to accept or reject a purchase order in the community offering. Any determination to accept or reject purchase orders in the community offering will be based on the facts and circumstances known to us at the time.

If we do not have sufficient shares of common stock available to fill the orders of natural persons residing in the Westernwestern North Carolina counties of Buncombe, Clay, Cherokee, Graham, Haywood, Henderson, Jackson, Macon, Polk, Swain and Transylvania, and Rabun County, Georgia, we will allocate the available shares among those residents in a manner that permits each of them, to the extent possible, to purchase the lesser of 100 shares, or the number of shares ordered by such person. Thereafter, unallocated shares will be allocated among residents

whose orders remain unsatisfied on an equal number of shares basis per order. If instead, oversubscription occurs among other members of the general public residing in the aforementioned counties, we will allocate the available shares among those persons in the same manner described above.

The term “residing” or “resident” as used in this prospectus means any person who occupies a dwelling within the aforementioned counties, has a present intent to remain within the community for a period of time, and manifests the genuineness of that intent by establishing an ongoing physical presence within the community, together with an indication that this presence within the community is something other than merely transitory in nature. To the extent the person is a corporation or other business entity, the principal place of business or headquarters shall determine residency under this provision. To the extent a person is a personal benefit plan or trustee, the circumstances of the beneficiary shall apply with respect to this definition. In the case of all other benefit plans or trusts, the circumstances of the trustee shall be examined for purposes of this definition. We may utilize deposit or loan records or other evidence provided to us to decide whether a person is a resident. In all cases, however, the determination shall be in our sole discretion.

Expiration Date.The community offering may begin at the same time as, during or after the subscription offering. It is currently expected to terminate at the same time as the subscription offering. We may decide to extend the community offering for any reason and are not required to give purchasers notice of any such extension. Extensions may not go beyond [final expiration date], which is two years after the special meeting of voting members to vote on the conversion.

Syndicated Offering

The plan of conversion provides that, if feasible, shares of common stock not purchased in the subscription offering and community offering may be offered for sale to members of the general public in a syndicated offering through a syndicate of registered broker-dealers managed by Raymond James & Associates, Inc.Sandler O’Neill. Provided that the subscription offering has commenced, we may commence the syndicated offering at any time. We have the right, in our sole discretion, have the right to reject orders, in whole or in part, received in the syndicated offering. Neither Raymond James & Associates, Inc.Sandler O’Neill nor any registered broker-dealer shall have any obligation to take or purchase any shares of common stock in the syndicated offering; however, Raymond James & Associates, Inc.Sandler O’Neill has agreed to use its best efforts in the sale of shares in any syndicated offering.

The price at which common stock is sold in the syndicated offering will be the same $10.00 price at which shares are offered and sold in the subscription offering and community offering. Each person may purchase up to 75,00030,000 shares of common stock in the syndicated offering, subject to the maximum purchase limitations. See “– Limitations on Common Stock Purchases” on page.

If a syndicated offering is held, Raymond James & Associates, Inc.Sandler O’Neill will serve as sole book running manager. In such capacity, Raymond James & Associates, Inc.Sandler O’Neill may form a syndicate of other broker-dealers who are Financial Industry Regulatory Authority (“FINRA”) member firms. Neither Raymond James & Associates, Inc.Sandler O’Neill nor any registered broker-dealer will have any obligation to take or purchase any shares of the common stock in the syndicated offering. The syndicated offering will be conducted in accordance with certain SEC rules applicable to best efforts offerings. Under these rules, Raymond James & Associates, Inc.Sandler O’Neill or the other broker-dealers participating in the syndicated offering generally will accept payment for shares of common stock to be purchased in the syndicated offering through a sweep arrangement under which a

customer’s brokerage account at the applicable participating broker-dealer will be debited in the amount of the purchase price for the shares of common stock that such customer wishes to purchase in the syndicated offering on the settlement date. Customers who authorize participating broker-dealers to debit their brokerage accounts are required to have the funds for the payment in their accounts on, but not before, the settlement date. The sweep arrangements will meet the following conditions: (1)(i) shares will only be sold to customers with accounts at Raymond James & Associates, Inc.Sandler O’Neill or at another participating broker-dealer; and (2)(ii) accounts will not be swept until the settlement date, which will only occur after the minimum number of shares are sold. Institutional investors will pay Raymond James & Associates, Inc.Sandler O’Neill in its capacity as sole book running manager, for shares purchased in the syndicated offering on the settlement date through the services of the Depository Trust Company on a delivery versus payment basis. The closing of the syndicated offering is subject to conditions set forth in an agency agreement among us and the Bank on one hand and Raymond James & Associates, Inc.,Sandler O’Neill, as representative of the several agents, on the other hand. If and when all the conditions for the closing are met, funds for common stock sold in the syndicated offering, less fees and commissions payable by us, will be delivered promptly to us. If the offering is consummated, but some or all of an interested investor’s funds are not accepted by us, those funds will be returned to the interested investor promptly after closing, without interest. If the offering is not consummated, funds in the account will be returned promptly, without interest, to the potential investor. Normal customer ticketing will be used for order placement. In the syndicated offering, order forms will not be used.

Limitations on Common Stock Purchases

The plan of conversion includes the following limitations on the number of shares of common stock that may be purchased in the offering:

  

the maximum number of shares of common stock that may be purchased by a person in any single category of the offering,i.e., the subscription offering, the community offering or the syndicated offering, is 75,00030,000 shares;

 

no person or entity together with any associate or group of persons acting in concert may purchase more than 125,00050,000 shares of common stock in the offering;

 

the maximum number of shares of common stock that may be purchased in all categories of the offering by our executive officers and directors and their associates, in the aggregate, may not exceed 25% of the shares issued in the offering; and

 

the minimum purchase by each person purchasing shares in the offering is 25 shares, to the extent those shares are available.

Depending upon market or financial conditions, and subject to any required regulatory approvals and the requirements of applicable laws and regulations, but without further approval of our members, we may decrease or increase the purchase limitations to a percentage which does not exceed 4.99% of the shares issued in the offering. In the event that the maximum purchase limitation is increased to 4.99% of the shares issued in the offering, this limitation may be further increased to 9.99%, provided that orders for common stock exceeding 4.99% shall not exceed in the aggregate 10% of the shares of common stock issued in the offering.

If a purchase limitation is increased, subscribers in the subscription offering who ordered the maximum amount will be given the opportunity to increase their subscriptions up to the then-applicable limit. The effect of this type of resolicitation would be an increase in the number of shares of common stock owned by subscribers who choose to increase their subscriptions. In connection with this type of resolicitation, we may allow payment by wire transfer and disallow payment by personal check.

If a purchase limitation is decreased, subscribers in the subscription offering or any other offering, who ordered more than the new purchase limitation shall be decreased by the minimum amount necessary so that such person shall be in compliance with the then maximum number of shares permitted to be subscribed for by such person.

In the event of an increase in the total number of shares offered in the subscription due to an increase in the maximum of the offering range of up to 15%, the additional shares will be allocated in accordance with the priorities set out above.

The term “associate” of a person means:

 

(1)any corporation or organization, other than Macon Financial, Bancorp, the Bank, or a majority-owned subsidiary of these entities, of which the person is a senior officer, partner or 10% beneficial shareholder;
any corporation or organization, other than Entegra, Bancorp, the Bank, or a majority-owned subsidiary of these entities, of which the person is a senior officer, partner or 10% beneficial shareholder;

 

(2)any trust or other estate in which the person has a substantial beneficial interest or serves as a trustee or in a fiduciary capacity, excluding any employee stock benefit plan in which the person has a substantial beneficial interest or serves as trustee or in a fiduciary capacity; and
any trust or other estate in which the person has a substantial beneficial interest or serves as a trustee or in a fiduciary capacity; and

 

(3)any blood or marriage relative of the person, who either lives in the same home as the person or who is a director or executive officer of Macon Financial, Bancorp or the Bank.
any blood or marriage relative of the person, who either lives in the same home as the person or who is a director or executive officer of Entegra, Bancorp or the Bank.

The term “acting in concert” means:

 

(1)Knowing participation in a joint activity or interdependent conscious parallel action towards a common goal whether or not pursuant to an express agreement; or
knowing participation in a joint activity or interdependent conscious parallel action towards a common goal whether or not pursuant to an express agreement; or

 

(2)A combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise.
a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise.

A person or company that acts in concert with another person or company (“other party”) shall also be deemed to be acting in concert with any person or company who is also acting in concert with that other party, except that any tax-qualified employee stock benefit plan will not be deemed to be acting in concert with its trustee or a person who serves in a similar capacity solely for the purpose of determining whether common stock held by the trustee and common stock held by the employee stock benefit plan will be aggregated.

Our directors are not treated as associates of each other solely because they are members of our Board of Directors. We have the right to determine whether prospective purchasers are associates or acting in concert. Shares of common stock

purchased in the offering will be freely transferable except for shares purchased by our executive officers and directors and except as described below. Any purchases made by any associate of Macon Financial,Entegra, Bancorp or the Bank for the explicit purpose of meeting the minimum number of shares of common

stock required to be sold in order to complete the offering shall be made for investment purposes only and not with a view toward redistribution. In addition, under the guidelines of FINRA, members of FINRA and their associates are subject to certain restrictions on transfer of securities purchased in accordance with subscription rights and to certain reporting requirements upon purchase of these securities. For a further discussion of limitations on purchases of shares of our common stock at the time of conversion and thereafter, see “– Certain Restrictions on Purchase or Transfer of Our Shares After Conversion”the Conversion Applicable to Officers and Directors” on pageand “– Certain Restrictions Having Anti-Takeover Effect”“Restrictions on Acquisition of Entegra – “Anti-takeover” effects of Entegra’s Articles of Incorporation and Bylaws” on page.

Marketing and Distribution; Compensation

Subscription and Community Offerings.To assist in the marketing of our common stock, we have retained Raymond James & Associates, Inc.,Sandler O’Neill, which is a broker-dealer registered with FINRA. Raymond James & Associates, Inc.Sandler O’Neill will act as conversion advisor with respect to the conversion and marketing agent on a best efforts basis in the offering.subscription and community offerings. The services of Raymond James & Associates, Inc.Sandler O’Neill include, but are not limited to:

 

consulting as to the financial and securities market implications of the plan of conversion and any related corporate documents;

conversion;

 

reviewing with the Board of Directors the financial impact of the offering on Macon Financial;

Entegra;

 

reviewing all offering documents, including the prospectus, stock order forms and related offering materials;

materials (we are responsible for the preparation and filing of such documents);

 

assisting in the design and implementation of a marketing strategy for the offering;

 

assist us in analyzing proposals from outside vendors retained in connection with the stock offering, including printers, transfer agents and proxy solicitation/tabulation firms;

assisting management in scheduling and preparing for meetings with potential investors in the offering; and

 

providing such other general advice and assistance as we may request to promote the successful completion of the offering.

For these services, Raymond James & Associates, Inc.Sandler O’Neill will receive an advisory and administrativea marketing fee of $and%in connection with the offering equal to (a) 1.0% of the dollar amountaggregate purchase price of allthe shares of common stock sold in the subscription andoffering, plus (b) 1.75% of the aggregate purchase price of the shares sold in the community offerings. No salesoffering, except that no fee will be payable to Raymond James & Associates, Inc.paid with respect to shares purchased by our directors, officers directors and employees or members of their immediate families. In

Syndicated Offering.To the event that Raymond James & Associates, Inc. sells common stock through a group of broker-dealersextent shares remain available after the subscription and community offerings, we may sell the shares to the general public in a syndicated offering, it“syndicated offering.” Sandler O’Neill and any other selected dealers will be paid a fee equalreceive aggregate fees not to% exceed 5.5% of the dollar amountaggregate price of totalany shares sold in the syndicated offering, which fee along with the fee payable to selected dealers (which will include Raymond James & Associates, Inc.) shall not exceed% in the aggregate. Raymond James & Associates, Inc. will serve as sole book running manager. Raymond James & Associates, Inc.offering.

Expenses.Sandler O’Neill also will be reimbursed for allocableits legal fees and expenses, up to a maximum of $75,000, and its other reasonable out-of-pocket expenses, up to a maximum of $25,000. If the plan of conversion is terminated or if Sandler O’Neill engagement is terminated under certain circumstances as set forth in an amount not to exceed $for the subscription offering and community offering and $for the syndicated offering. In addition, Raymond James & Associates, Inc.our agreement, Sandler O’Neill will be reimbursed upentitled to $for attorney’s fees.receive reimbursement of its reasonable out-of-pocket expenses.

In the event that we are required to resolicit subscribers for shares of our common stock in the subscription and community offerings, Raymond James & Associates, Inc. will be required to provide significant additional services in connection with the resolicitation (including repeating the services described above), and we shall pay Raymond James & Associates, Inc. an additional fee for those services that will not exceed $. In the event of a material delay in the offering, Raymond James & Associates, Inc. also will be reimbursed for additional allocable expenses in an amount not to exceed $and additional attorneys’ fees and allocable expenses in an amount not to exceed $provided that in the aggregate, all reimbursable expenses and legal fees shall not exceed $.

Indemnity.We will indemnify Raymond James & Associates, Inc.Sandler O’Neill against liabilities and expenses, including legal fees, incurred in connection with certain claims or litigation arising out of or based upon untrue statements or omissions contained in the offering materials for the common stock, including liabilities under the Securities Act.

In addition, weRecords Management

We have also engaged Ellen Philips Associates, Inc.Sandler O’Neill to act as our records management agent in connection with the conversion and offering. In its role as records management agent, Ellen Philips Associates, Inc.Sandler O’Neill will coordinate with our data processing contacts and interface withprovide the Stock Information Center to provide records processing and proxy and stock order services, including but not limited to: following services:

consolidation of deposit accounts and vote calculation;

design and preparation of information forproxy forms and stock order forms for the subscription and community offerings;

organization and supervision of the Stock Information Center;

coordination of proxy cards; interfacing withsolicitation and special meeting services for our financial printer;special meeting of members; and tabulating proxy votes.

subscription services.

For these services, Ellen Philips Associates, Inc. will receiveSandler O’Neill has received a fee of $,$10,000 and we will have madereceive an advance paymentadditional $20,000 upon the mailing of $with respectproxy and subscription materials to this fee. WeBancorp’s members. Sandler O’Neill also will also reimburse Ellen Philips Associates, Inc.be reimbursed for its reasonable out-of-pocket expenses, associated with its actingup to a maximum of $30,000.

Indemnity. We will indemnify Sandler O’Neill against liabilities and expenses (including legal fees) related to or arising out of Sandler O’Neill’s engagement as informationour records management agent and their performance of services in that capacity.

Sandler O’Neill has not prepared any report or opinion constituting a recommendation or advice to us or to persons who subscribe for our common stock, nor have they prepared an amountopinion as to the fairness to us of the purchase price or the terms of the common stock to be sold in the conversion and offering. Sandler O’Neill does not express any opinion as to exceed $.the prices at which common stock to be issued may trade.

Description of Sales Activities

Macon Financial will offer the common stock in the subscription offering and community offering by the distribution of this prospectus and through activities conducted at the stock information center. The stock information center is expected to operate during normal business hours throughout the subscription offering and any community offering. It is expected that at any particular time one or more Raymond James & Associates, Inc. employees will be working at the stock information center. Employees of Raymond James & Associates, Inc. will be responsible for responding to questions regarding the conversion and the offering and processing stock orders.

Our directors and executive officers may participate in the solicitation of offers to purchase common stock. These persons will be reimbursed for their reasonable out-of-pocket expenses incurred in connection with the solicitation. Other trained employees may assist in the offering in ministerial capacities, providing clerical work in effecting a sales transaction or answering questions of a ministerial nature. No offers or sales may be made by tellers or at the teller counters. Investment related questions of prospective purchasers will be directed to executive officers or registered representatives of Raymond James & Associates, Inc.Sandler O’Neill. Our other employees have been instructed not to solicit offers to purchase shares of common stock or provide advice regarding the purchase of common stock. We will rely on Rule 3a4-1 under the Exchange Act, and sales of common stock will be conducted within the requirements of Rule 3a4-1, so as to permit officers, directors and employees to participate in the sale of common stock. None of our officers, directors or employees will be compensated in connection with their participation in the offering by the payment of commissions or other remuneration based either directly or indirectly on the transactions in the shares of common stock.

The offering will comply with the requirements of Rule 10b-9 under the Exchange Act.

Prospectus Delivery

To ensure that each purchaser receives a prospectus at least 48 hours before the expiration date of the offering in accordance with Rule 15c2-8 of the Exchange Act, we do not intend to mail a prospectus any later than five (5) days prior to the expiration date or hand deliver any later than two (2) days prior to the expiration date. Execution of an order form will confirm receipt of delivery in accordance with Rule 15c2-8. Order forms will only be distributed with or preceded by a prospectus.

In the syndicated offering, a prospectus in electronic format may be made available on the internet sites or through other online services maintained by Raymond James & Associates, Inc.Sandler O’Neill or one or more other members of the syndicate, or by their respective affiliates. In those cases, prospective investors may view offering terms online and, depending upon the syndicate member, prospective investors may be allowed to place orders online. The members of the syndicate may agree with us to allocate a specific number of shares for sale to online brokerage account holders. Any such allocation for online distributions will be made on the same basis as other allocations.

Other than the prospectus in electronic format, the information on the internet sites referenced in the preceding paragraph and any information contained in any other internet site maintained by any member of the syndicate is not part of this prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or by Raymond James & Associates, Inc.Sandler O’Neill or any other member of the syndicate in its capacity as selling agent or syndicate member and should not be relied upon by investors.

Procedure for Purchasing Shares

Expiration Date.The offering will expire at 2:4:00 p.m., Eastern Daylight Time, on [expiration date], unless extended by us. This extension may be approved by us, in our sole discretion, without further approval or additional notice to purchasers in the offering, except that certain additional restrictions on the resale or subsequent disposition of the shares shall apply.

We will not execute orders until at least the minimum number of shares offered has been sold. If we have not sold the minimum by the expiration date or any extension thereof, we may terminate the offering and promptly refund all funds received for shares of common stock, as described above. Extensions may not go beyond [final expiration date], which is two years after the special meeting of voting members to vote on the conversion.

We reserve the right in our sole discretion (subject to any necessary regulatory approvals) to terminate the offering at any time and for any reason, in which case we will cancel any deposit account withdrawal orders and promptly return all funds delivered to us, with interest at the Bank’s current tier 1 statement savings rate from the date the stock order was processed.

We have the right to reject any order submitted in the offering by a person whom we believe is making false representations or who we otherwise believe, either alone or acting in concert with others, is violating, evading, circumventing, or intends to violate, evade or circumvent the terms and conditions of the plan of conversion.

Use of Order Forms.In order to purchase shares of common stock in the subscription offering and community offering, you must complete an original stock order form and remit full payment. We will not be required to accept incomplete order forms, unsigned order forms or orders submitted on photocopied or facsimiled order forms. Stock order forms must be received (not postmarked) prior to 2:4:00 p.m., Eastern Daylight Time, on [expiration date], unless extended by us. We are not required to accept order forms that are not received by that time or that are received without full payment or without appropriate withdrawal instructions. We are not required to notify subscribers of incomplete or improperly executed order forms. We have the right to permit the correction of incomplete or improperly executed order forms or waive immaterial irregularities. You may submit your stock order form by mail using the order reply envelope provided or by overnight courier to our Stock Information Center, at the address indicated on the order form. We will not accept faxed order forms. Other than our Stock Information Center, we will not accept stock order forms at our banking offices. Once tendered, an order form cannot be modified or revoked without our consent. We reserve the absolute right, in our sole discretion, to reject orders received in the community offering, in whole or in part, at the time of receipt or at any time prior to completion of the offering. If you are ordering shares in the subscription offering, you must represent that you are purchasing shares for your own account and that you have no agreement or understanding with any person for the sale or transfer of the shares. Our interpretation of the terms and conditions of the plan of conversion and of the acceptability of the order forms will be final, subject to regulatory authority.

By signing the order form, you will be acknowledging that the common stock is not a deposit or savings account and is not federally insured or otherwise guaranteed by the Bank, the FDIC or the federal government, and that you received a copy of this prospectus. However, signing the order form will not result in you waiving your rights under the Securities Act or the Exchange Act.

Payment for Shares.Payment for all shares of common stock will be required to accompany all completed order forms for the purchase to be valid. Payment for shares may be made by:

 

(1)personal check, bank check or money order, payable to “Macon Financial Corp.”; or
personal check, bank check or money order, payable to “Entegra Financial Corp.”; or

 

(2)authorization of withdrawal from the types of Bank deposit accounts designated on the order form.
authorization of withdrawal from the types of Bank deposit accounts designated on the order form.

Appropriate means for designating withdrawals from deposit accounts at the Bank are provided in the order forms. The funds designated must be available in the account(s) at the time the order form is received. A hold will be placed on these funds, making them unavailable to the depositor. Funds authorized for withdrawal will continue to earn interest within the account at the contract rate until the offering is completed, at which time the designated withdrawal will be made. Interest penalties for early withdrawal applicable to certificate accounts will not apply to withdrawals authorized for the purchase of shares of common stock; however, if a withdrawal results in a certificate account with a balance less than the applicable minimum balance requirement, the certificate will be canceled at the time of withdrawal without penalty and the remaining balance will be transferred to a savings account and earn interest calculated at the tier 1 statement savings rate current at the time. In the case of payments made by personal check, these funds must be available in the account(s). Payments made by check or money order will be immediately cashed and placed in a segregated account at the Bank and will earn interest at our tier 1 statement savings rate until the offering is completed or terminated.

You may not remit cash, wire transfers, Bank line of credit checks, or third-party checks (including those payable to you and endorsed over to Bancorp). You may not designate on your stock order form a direct withdrawal from a Bank retirement account. See “– Using IRA Funds to Purchase Shares” on pageShares,” below, for information on using such funds. Additionally, you may not designate a direct withdrawal from Bank accounts with check-writing privileges. Please provide a check instead. In the event we resolicit large purchasers, as described above in “– Limitations on Common Stock Purchases” on page, such purchasers who wish to increase their purchases will not be able to use personal checks to pay for the additional shares, but may pay by wire transfer.

Once we receive your executed order form, it may not be modified, amended or rescinded without our consent, unless the offering is not completed by [extension date], as described in “– Expiration Date.”Date” on page         .

We will have the right, in our sole discretion, to permit institutional investors to submit irrevocable orders together with the legally binding commitment for payment and to thereafter pay for the shares of common stock for which they subscribe in the syndicated offering at any time prior to the completion of the offering. This payment may be made by wire transfer.

The Bank will not loan funds or extend credit to any persons to purchase shares of common stock in the offering.

Using IRA Funds to Purchase Shares.If you are interested in using your individual retirement account (“IRA”) funds, or any other retirement account funds, to purchase shares of common stock, you must do so through a self-directed retirement account, such as offered by brokerage firms. By regulation, the Bank’s IRA or other retirement accounts are not self-directed, so they cannot be invested in our shares of common stock. Therefore, if you wish to use your funds that are currently in a Bank retirement account, you may not designate on the stock order form that you wish funds to be withdrawn from the account for the purchase of common stock. Before you place your order, the funds you wish to use for the purchase of common stock will have to be transferred to another bank or a brokerage account offering self-directed accounts. There will be no early withdrawal or interest penalties for these transfers. The new trustee or custodian will hold the shares of common stock in a self-directed account in the same manner as we now hold the depositor’s retirement account funds. An annual administrative fee may be payable to the new trustee or custodian. Assistance on how to transfer retirement accounts maintained at the Bank can be obtained from the Stock Information Center.

Subscribers interested in using funds in an IRA or any other retirement account, whether held at the Bank or elsewhere, to purchase shares of common stock, should contact our Stock Information Center for guidance as soon as possible, preferably at least two weeks prior to the [expiration date] offering deadline. Processing such transactions takes additional time, and whether such funds can be used may depend on limitations imposed by the institutions where such funds are currently held. We cannot guarantee that you will be able to use such funds.

Delivery of Shares of Common Stock in the Subscription and Community Offerings.Information regardingAll shares of common stock sold will be issued in book entry form. Stock certificates will not be issued. A statement reflecting ownership of shares of common stock issued in the subscription and community offerings or in any syndicated offering will be mailed by regular mailour transfer agent to the persons entitled thereto at the certificate registration address noted by them on thetheir stock order form,forms as soon as practicable following consummation of the conversion and offering. We expect trading in the stock to begin on the day of completion of the conversion and offering.offering or the next business day. The conversion and offering are expected to be completed as soon as practicable following satisfaction of the conditions described above in “Summary – Conditions to Completion of the Conversion and the Offering.”It is possible that until this informationa statement reflecting ownership of shares of common stock is available and delivered to purchasers, maypurchasers might not be able to sell the shares of common stock that they ordered,purchased, even though the common stock will have begun trading.In order Your ability to reduce non-essential costs, we do not intend to issue papersell your shares of common stock certificates, unlessbefore receiving your statement will depend on arrangements you may make with a shareholder specifically requests a paper stock certificate. Instead, except for shareholders who specifically request a paper stock certificate, the holdings of each shareholder will be recorded in “book entry” form on our records and we will issue shareholders a written statement, containing all of the information usually provided in the certificate.brokerage firm.

Other Restrictions.Notwithstanding any other provision of the plan of conversion, no person is entitled to purchase any shares of common stock to the extent the purchase would be illegal under any federal or state law or regulation, including state “blue sky” regulations, or would violate regulations or policies of FINRA, particularly those regarding free riding and withholding. We may ask for an acceptable legal opinion from any purchaser as to the legality of his or her purchase and we may refuse to honor any purchase order if an opinion is not timely furnished. In addition, we are not required to issue subscription rights or offer shares of common stock to any person who resides in a foreign country or in a state of the U.S. with respect to which any of the following apply: (1)(i) a small number of persons otherwise eligible to subscribe for shares reside in such state; (2)(ii) the issuance of subscription rights or the offer or sale of such shares of common stock to such persons would require us under the securities laws of such state, to register as a broker, dealer, salesman or agent or to register or otherwise qualify its securities for sale in such state; or (3)(iii) such registration or qualification would be impracticable for reasons of cost or otherwise.

Restrictions on Transfer of Subscription Rights and Shares

The plan of conversion prohibits any person with subscription rights, including the Eligible Account Holders, the Supplemental Eligible Account Holders, Other Depositors and Other Members, from transferring or entering into any agreement or understanding to transfer the legal or beneficial ownership of the subscription rights issued thereunder or the shares of common stock to be issued upon their exercise. These rights may be exercised only by the person to whom they are granted and only for his or her account. Each person exercising subscription rights will be required to certify that he or she is purchasing shares solely for his or her own account and that he or she has no agreement or understanding regarding the sale or transfer of such shares.

We intend to pursue any and all legal and equitable remedies in the event we become aware of the transfer of subscription rights, and we will not honor orders that we believe involve the transfer of subscription rights.

Stock Information Center

Our banking office personnel may not, by law, assist with investment related questions. If you have any questions regarding the offering, please call our Stock Information Center, toll free, at (        )          -         , Monday through Friday

between 10:00 a.m. and 4:00 p.m., Eastern Daylight Time. The Stock Information Center will be closed weekends and bank holidays.

Restrictions on Repurchase of Stock

Under Federal Reserve regulations, for a period of one year from the date of the completion of the offering we may not repurchase any of our common stock from any person, except (i) in an offer made to all shareholders to repurchase the common stock on a pro rata basis, approved by the Federal Reserve, (ii) the repurchase of qualifying shares of a director, or (iii) repurchases to fund restricted stock plans or tax-qualified employee stock benefit plans. Where extraordinary circumstances exist, the Federal Reserve may approve the open market repurchase of up to 5% of our common stock during the first year following the conversion and offering. To receive such approval, we must establish compelling and valid business purposes for the repurchase to the satisfaction of the Federal Reserve. Based on the foregoing restrictions, we anticipate that we will not repurchase any shares of our common stock in the year following completion of the conversion and offering.

Liquidation Rights

Liquidation prior to the conversion.In the unlikely event of a complete liquidation of Bancorp and the Bank or a liquidation solely of the Bank prior to the conversion, all claims of creditors of the Bank (including depositors of the Bank to the extent of their deposit balances) would be paid first. Thereafter, any assets of the Bank remaining would be distributed to depositors of the Bank based on the relative size of their deposit balances in the Bank immediately prior to the liquidation.

Liquidation following the conversion.In the unlikely event that the Bank were to liquidate after the conversion, all claims of creditors, including depositors of the Bank to the extent of their deposit balances, would be paid first. However, except with respect to the liquidation accounts to be established in Macon FinancialEntegra and the Bank as further described below, a depositor’s claim would be solely for the principal amount of his or her deposit accounts plus accrued interest. Depositors would not have an interest in the value of the assets of Macon FinancialEntegra or the Bank above that amount.

The plan of conversion provides that, upon the completion of the conversion, we are to establish a “liquidation account” for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders in an amount equal to our total equity as reflected in our latest statement of financial condition contained in this prospectus and used in the offering. The plan of conversion also provides for the establishment of a bank liquidation account at the Bank to support our liquidation account in the event we do not have sufficient capital resources to fund our obligation under our liquidation account.

The liquidation account established by us is designed to provide depositors a liquidation interest after the conversion in the event of a complete liquidation of Macon FinancialEntegra and the Bank, or a liquidation solely of the Bank. Specifically, in the unlikely event that either (1)(i) the Bank or (2) Macon Financial(ii) Entegra and the Bank were to liquidate after the conversion, all claims of creditors (including depositors of the Bank to the extent of their deposit balances), would be paid first, followed by distribution to depositors as of December 31, 20092012 and [supplemental eligibility date] of their interests in the liquidation account maintained by us. Also, in a complete liquidation of both entities, or of the Bank alone, when we have insufficient assets (other than the stock of the Bank), to fund the liquidation account distributions due to Eligible Account Holders and Supplemental Eligible Account Holders, and the Bank has positive net worth, the Bank shall immediately make a distribution to fund Macon Financial’sEntegra’s remaining obligations under the liquidation account. If Macon FinancialEntegra is completely liquidated or sold apart from a sale or liquidation of the Bank, then Macon Financial’sEntegra’s liquidation account will cease to exist and Eligible Account Holders and Supplemental Eligible Account Holders will receive an equivalent interest in the Bank liquidation account, subject to the same rights and terms as the liquidation account. In no event will any Eligible Account Holder or Supplemental Eligible Account Holder be entitled to a distribution that exceeds such holder’s interest in Macon Financial’sEntegra’s liquidation account.

Under applicable rules and regulatory policies, a post-conversion merger, consolidation, or similar combination with another depository institution in which Macon FinancialEntegra or the Bank are not the surviving institution would not be considered a liquidation. In such a transaction, the liquidation account would be assumed by the surviving holding company or institution.

Each Eligible Account Holder or Supplemental Eligible Account Holder would have an initial pro rata interest in the liquidation account for each deposit account, including savings accounts, transaction accounts such as negotiable order of withdrawal accounts, money market deposit accounts, and certificates of deposit, with a balance of $100.00 or more held in the Bank on December 31, 20092012 or [supplemental eligibility date] equal to the proportion that the balance of each Eligible Account Holder and Supplemental Eligible Account Holder’s deposit account on December 31, 20092012 or [supplemental eligibility date] respectively, bears to the balance of all deposit accounts of Eligible Account Holders and Supplemental Eligible Account Holders in the Bank on such dates.

If, however, on any December 31 annual closing date commencing after the effective date of the conversion, the amount in any such deposit account is less than the amount in the deposit account on December 31, 20092012 or [supplemental eligibility date], or any other annual closing date, then the interest in the liquidation account relating to such deposit account would be reduced from time to time by the proportion of any such reduction, and such interest will cease to exist if such deposit account is closed. In addition, no interest in the liquidation account would ever be increased despite any subsequent increase in the related deposit account. Payment pursuant to liquidation rights of Eligible Account Holders and Supplemental Eligible Account Holders would be separate and apart from the payment of any insured deposit accounts to such depositors.

Any assets remaining after the above liquidation rights of Eligible Account Holders and Supplemental Eligible Account Holders are satisfied would be available for distribution to shareholders.

Material Income Tax Consequences

Completion of the mutual-to-stock conversion is subject to the prior receipt of either a private letter ruling from the Internal Revenue Service or an opinion of counsel with respect to federal tax consequences and a private letter ruling from the state taxing authority, an opinion of counsel, or a letter of advice from a tax advisor with respect to applicable state tax consequences of the conversion to Macon Financial,Entegra, Macon Bancorp, Macon Bank and Account Holders of Macon Bank. Unlike private letter rulings, the opinions of counsel or tax advisors are not binding on the Internal Revenue Service or any state taxing authority, and such authorities may disagree with such opinions. In the event of such disagreement, there can be no assurance that Macon FinancialEntegra or Macon Bank would prevail in a judicial proceeding.

We have received an opinion of counsel, Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P., as to the federal and North Carolina state tax consequences of the conversion, including an opinion to the effect that the income tax consequences under North Carolina law of the offering are not materially different than for federal income tax purposes.

Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P., has issued an opinion to Macon Financial,Entegra, Macon Bancorp and Macon Bank that for federal and North Carolina income tax purposes:

 

 (1)(i)The conversion of Macon Bancorp’s charter to a North Carolina chartered stock corporation by merger of Macon Bancorp with and into Macon FinancialEntegra with Macon FinancialEntegra as the resulting entity will constitute a reorganization within the meaning of Section 368(a) of the Code and therefore will qualify as a tax-free reorganization within the meaning of the Code. None of Macon Financial,Entegra, Macon Bancorp, Macon Bank or Account Holders will recognize any gain or loss as a result of the Conversion.

 

 (2)(ii)It is more likely than not that the fair market value of the nontransferable subscription rights to purchase Macon FinancialEntegra common stock is zero. Accordingly, it is more likely than not that no gain or loss will be recognized by Account Holders upon distribution to them of nontransferable subscription rights to purchase shares of Macon FinancialEntegra common stock. Account Holders will not realize any taxable income as a result of their exercise of the nontransferable subscriptions rights.

 

 (3)(iii)It is more likely than not that the basis of Macon FinancialEntegra common stock purchased in the offering by the exercise of the nontransferable subscription rights will be the purchase price thereof, and that the holding period for such shares of common stock will begin on the date of completion of the offering.

 

 (4)(iv)No gain or loss will be recognized by Macon FinancialEntegra on the receipt of money in exchange for Macon FinancialEntegra common stock sold in the offering.

 

 (5)(v)For North Carolina income tax purposes, the conversion will be treated in a manner identical to the way the conversion is treated pursuant to the Code.

The opinion under item 2(ii) above is based on the position that the subscription rights to purchase shares of Macon FinancialEntegra common stock received by Account Holders have a fair market value of zero. The opinion under item 3(iii) above is predicated on the representation that no person shall receive any payment, whether in money or property, in lieu of the issuance of subscription rights. Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P.

noted that the subscription rights will be granted at no cost to the recipients, will be legally nontransferable and of short duration, and will provide the recipient with the right only to purchase shares of Macon FinancialEntegra common stock at the same price to be paid by members of the general public in any community offering or syndicated offering. Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P. also noted that the Internal Revenue Service has not in the past concluded that subscription rights have value. In addition, Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P. noted that Macon FinancialEntegra has issued a letter stating its belief that subscription rights do not have any economic value at the time of distribution or at the time the rights are exercised in the subscription offering. Based on the foregoing, Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P. believes it is more likely than not that the nontransferable subscription rights to purchase Macon FinancialEntegra common stock have no value. However, the issue of whether nontransferable subscription rights have value is based on all the facts and circumstances.

If the subscription rights are subsequently found to have an economic value, income may be recognized by various recipients of the subscription rights (in certain cases, whether or not the rights are exercised) and Macon FinancialEntegra and/or Macon Bank may be subject to tax on the distribution of the subscription rights.

The opinion of Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P., unlike a letter ruling issued by the Internal Revenue Service, is not binding on the Internal Revenue Service and the conclusions expressed therein may be challenged at a future date. The Internal Revenue Service has issued favorable private letter rulings for transactions similar to the conversion and offering, but any such ruling may not be cited as precedent by any taxpayer other than the taxpayer to whom the ruling is addressed. We do not plan to apply for a letter ruling concerning the transactions described herein.

The federal tax opinion has been filed with the SEC as an exhibit to our registration statement.

Restrictions on Transfer of Shares After the Conversion Applicable to Officers and Directors

Common stock purchased in the offering will be freely transferable, except for shares purchased by our directors and executive officers.

All shares of common stock purchased in the offering by our directors or executive officers generally may not be sold for a period of one year following the closing of the conversion, except in the event of the death of the director or officer. Each information statement for restricted shares will bear a legend giving notice of this restriction on transfer, and instructions will be issued to the effect that any transfer within this time period of record ownership of the shares other than as provided above is a violation of the restriction. Any shares of common stock issued at a later date as a stock dividend, stock split or otherwise with respect to the restricted stock will be similarly restricted. Our directors and executive officers also will be restricted by the insider trading rules promulgated pursuant to the Exchange Act.

Purchases of shares of our common stock by any of our directors or executive officers during the three-year period following the closing of the conversion may be made only through a broker or dealer registered with the SEC, except with prior written regulatory approval. This restriction does not apply, however, to negotiated transactions involving more than 1% of our outstanding common stock, to purchases of our common stock to fund stock options by one or more stock-based benefit plans or to any of our tax-qualified employee stock benefit plans or nontax-qualified employee stock benefit plans, including any stock-based benefit plans.

We have filed with the SEC a registration statement under the Securities Act, for the registration of the common stock to be issued in the offering. This registration does not cover the resale of the shares. Shares of common stock purchased by persons who are not affiliates of us may be resold without registration. Shares purchased by an affiliate of us will have resale restrictions under Rule 144 of the Securities Act. If we meet the current public information requirements of Rule 144, each affiliate of ours who complies with the other conditions of Rule 144, including those that require the affiliate’s sale to be aggregated with those of certain 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 our outstanding shares or the average weekly volume of trading in the shares during the preceding four calendar weeks. We may make future provision to permit affiliates to have their shares registered for sale under the Securities Act under certain circumstances.

Interpretation, Amendment and Termination

To the extent permitted by law, all interpretations by us of the plan of conversion will be final; however, such interpretations have no binding effect on our banking regulators. The plan of conversion provides that, if deemed necessary or desirable, we may substantively amend the plan of conversion as a result of comments from our banking regulators or otherwise. We may terminate the plan of conversion at any time.

RESTRICTIONS ON ACQUISITION OF MACON FINANCIALENTEGRA

Although our Board of Directors is not aware of any effort that might be made to obtain control of us after the conversion, our Board of Directors believes that it is appropriate to include certain provisions as part of our Articles to protect our interests and the interests of our shareholders from takeovers which our Board of Directors might conclude are not in our best interests or the best interests of our shareholders or subsidiaries.

The following discussion is a general summary of the material provisions of our Articles and Bylaws and of North Carolina corporate law, North Carolina banking law and certain other regulatory provisions that may be deemed to have an “anti-takeover” effect. The following description of certain of these provisions is necessarily general and, with respect to provisions contained in our Articles and Bylaws, reference should be made in each case to the document in question, each of which is part of the applications we have filed with the Commissioner and the Federal Reserve, and our registration statement filed with the SEC. See “Where You Can Find Additional Information” on page.

Macon Financial’s“Anti-takeover” effects of Entegra’s Articles of Incorporation and Bylaws

Our Articles and Bylaws contain a number of provisions relating to corporate governance and rights of shareholders that might discourage future takeover attempts. As a result, shareholders who might desire to participate in such transactions may not have an opportunity to do so. In addition, these provisions will also render the removal of our Board of Directors or management more difficult.

Evaluation of Certain Business Combinations.Our Articles establish certain restrictions on our consideration of offers by third parties to effect a Business Combination. “Business Combination” means any transfer in connection with (i) a combination or merger of Macon Financial,Entegra, (ii) the acquisition of more than 10% of Macon Financial’sEntegra’s outstanding voting shares, or (iii) a purchase or sale of a substantial portion of the assets of Macon FinancialEntegra or its subsidiary (a purchase or sale of 20% or more of the total assets of Macon FinancialEntegra or its subsidiary as of the end of the

most recent quarterly period being deemed as “substantial”) in each case, as applicable, which requires the approval of, or notice to and absence of objection by any federal or state banking regulator, the Federal Trade Commission or the Anti-Trust Division of the United States Department of Justice, or our shareholders, but excluding any reorganization, acquisition, merger, purchase or sale of assets, or combination initiated by us upon the vote of at least 51% of the Continuing Directors. “Continuing Directors” generally includes all members of our Board of Directors who are not affiliated with any third party offeror which (together with its affiliates and associates) is the beneficial owner of 10% or more of our voting shares (a “Related Person”).

Our Articles provide that our Board of Directors shall, when evaluating such an offer, in connection with the exercise of its judgment in determining what is in the best interests of Macon FinancialEntegra and its shareholders, give due consideration to all relevant factors, including, without limitation: (1)(i) the social and economic effects of acceptance of such an offer on our depositors, borrowers, other customers, employees, and creditors, and on the communities in which we operate or are located; (2)(ii) our ability and the ability of the Bank to fulfill the objectives of a bank holding company and/or savings bank, as applicable, and of banking entities, as applicable, under applicable federal and state statutes and regulations; (3)(iii) the business and financial condition and prospects and earnings prospects of the person or group proposing the combination, including, but not limited to, debt service and other existing financial obligations, financial obligations to be incurred in connection with the combination, and other likely financial obligations of such person or group, and the possible effect of such conditions and prospects upon us, the Bank and the communities in which we are located; (4)(iv) the competence, experience, and integrity of the person or group proposing the combination and its or their management; and (5)(v) the prospects for successful conclusion of the proposed combination. This provision could tend to make an acquisition of us more difficult to accomplish without the cooperation or a favorable recommendation of our Board of Directors. If our Board of Directors determines that any proposed transaction should be rejected, it may take any lawful action to defeat such transaction.

Approval of Business Combinations.Our Articles require the affirmative vote of 66.7% of our outstanding voting shares to approve a Business Combination, provided, however, that the 66.7% voting requirement shall not be applicable if the Business Combination is approved by our Board of Directors by the affirmative vote of (1)(i) at least 75% of the whole Board of Directors, and (2)(ii) if such Business Combination is proposed by a Related Person or at least 75% of the Continuing Directors, in either case at a duly called or convened regular or special meeting of our Board of Directors.

Staggered Board.In the first election of directors following the conversion, and in all elections thereafter, that the total number of directors is nine or more, the directors shall be divided into three classes, as nearly equal as possible in number as may be, to serve in the first instance for terms of one, two and three years, respectively, from the date such class of directors takes office or until their earlier death, resignation, retirement, removal or disqualification or until their successors shall be elected and shall qualify. Thereafter the successors in each class of directors shall be elected for terms of three years or until their earlier death, resignation, retirement, removal, or disqualification or until their successors shall be elected and shall qualify. Thus, it would take at least two annual elections to replace a majority of our directors. Our Bylaws impose notice and information requirements in connection with the nomination by shareholders of candidates for election to our Board of Directors or the proposal by shareholders of business to be acted upon at an annual meeting of shareholders. Such notice and information requirements are applicable to all shareholder business proposals and nominations, and are in addition to any requirements under the federal securities laws.

Election of Directors.Our Articles provide that in the case of election of directors, those nominees who receive a majority of the votes cast shall be elected; provided however in the event that two or more nominees are presented for election to the same directorship, the nominee receiving a plurality of the votes cast shall be elected.

Director Vacancies.Our Bylaws provide that any vacancy occurring in our Board of Directors, however caused, may be filled by an affirmative vote of the majority of the directors then in office, whether or not a quorum is present, and any director so chosen shall hold office only until the next annual meeting of shareholders at which directors are elected. This

provision is designed to afford anti-takeover protection by preventing shareholders from filling board vacancies with their own nominees.

Cumulative Voting.Our Articles do not provide for cumulative voting for any purpose. The absence of cumulative voting may afford anti-takeover protection by preventing a shareholder from casting a number of votes equal to the number of shares owned multiplied by the number of board seats up for election all for or against a single nominee for election as director. As a result, the absence of cumulative voting may make it more difficult for shareholders to elect nominees opposed by our Board of Directors.

Limitation on Voting Rights.Our Articles provide that until May 31, 2014,for a period of three years following the conversion, except with the prior approval of our Board of Directors by the affirmative vote of at least 75% of the whole Board, of Directors, in no event shall any record owner of shares of our common stock that are beneficially owned, directly or indirectly, by a person owning in excess of 10% of the then-outstanding shares of our common stock, be entitled to vote any of the shares of common stock held in excess of the 10% limit.

This provision is designed to affordsatisfy the Federal Reserve regulations which provide that for a period of three years following the date of the completion of the conversion, no person, acting singly or together with associates in a group of persons acting in concert, may directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10% of a class of Entegra’s equity securities without the prior written approval of the Federal Reserve, and restricts the voting rights of any person who exceeds the 10% threshold.

This provision affords anti-takeover protection by discouraging shareholders from acquiring more than 10% of our outstanding common stock and, for those shareholders who do acquire more than the 10% limit, by restricting their ability to influence the outcome of a shareholder vote. Absent this provision, under North Carolina law a shareholder would generally be permitted to vote all of the shares of common stock he or she owns, regardless of whether such holdings exceed 10% of the outstanding common stock. This limitation on voting rights may have the effect of preventing greater than 10% shareholders from voting all of their shares in favor of a proposed transaction or a nominee for director that our Board of Directors may oppose.

Restrictions on Call of Special Meetings.The Bylaws provide special meetings of our shareholders may only be called by our Chief Executive Officer or the Board of Directors.

Authorized but Unissued Shares. After the conversion, Macon FinancialEntegra will have authorized but unissued shares of common and preferred stock. See “Description of Capital Stock” on page       __.. Our Articles authorize 10,000,000 shares of preferred stock. Our Articles authorize our Board of Directors, from time to time by resolution and without further shareholder action, to provide for the issuance of shares of preferred stock, in one or more series, and to fix the designation, powers, preferences and other rights of the shares and to fix the qualifications, limitations and restrictions thereof.

As of December 31, 2013, we had a gross deferred tax asset of $26.8 million. Our preferred stock could be used in connection with the adoption of a shareholder rights plan, sometimes referred to as a “poison pill,” designed to protect our ability to use our deferred tax asset to offset future taxable income, which would be substantially limited if we experienced an “ownership change” under Section 382 of the Code. For example, a series of preferred stock could be designated that would be convertible into common stock upon a person or group acquiring a specified percentage of our common stock. Typically, such a shareholder rights plan provides that if a person or group acquires a specified percentage (usually 4.99%) of a corporation’s voting stock, the shareholders of that corporation (other than the person or group who purchased the specified percentage interest) have the right to purchase shares of the corporation’s common stock at a discount to the market price. This results in dilution to the person or group who purchased the specified percentage interest, both economically and in terms of their percentage ownership of the corporation’s shares. Our Board of Directors is able to implement a shareholder rights plan without further action by our shareholders.

As a result of its discretion with respect to the creation and issuance of preferred stock without shareholder approval, our Board of Directors could adversely affect the voting power of the holders of common stock and, by issuing shares of preferred stock with certain voting, conversion and/or redemption rights, could discourage any attempt to obtain control of us. The Board of Directors has no present plan or understanding to issue any preferred stock.

Amendments to our Articles and Bylaws.Except as provided under “– Authorized but Unissued Shares,” above, regarding the amendment of our Articles by our Board of Directors to provide for the issuance of shares of preferred stock, in one or more series, or as otherwise allowed by law, any amendment to our Articles must be approved by our Board of Directors and also by a majority of the outstanding shares of our voting stock; provided, however, that except with the prior approval of our Board of Directors by the affirmative vote of at least 75% of the whole Board of Directors, and, if at any time there is a Related Person, at least 75% of the Continuing Directors, approval by at least 75% of the outstanding voting stock, voting separately as a class, is required to amend the following provisions:

 

 (1)(i)The limitation on voting rights of persons who directly or indirectly beneficially own more than 10% of the outstanding shares of common stock, as described in “– Limitation on Voting Rights,” above;

 

 (2)(ii)The restrictions on our consideration of offers by third parties to effect a Business Combination, as described in “– Evaluation of Certain Business Combinations,” above;

 

 (3)(iii)The provision of our Articles requiring approval of at least 66.7% of our outstanding voting shares to approve a Business Combination, as described in “– Approval of Business Combinations,” above; and

 

 (4)(iv)The provision of our Articles requiring approval of at least 75% of the outstanding voting stock to amend the provisions of our Articles provided in (i) through (iii) of this list.

Change in Control Regulations

Federal law requires the approval of the Federal Reserve prior to any person or entity, or any persons or entities acting in concert, acquiring 10% or more of our common stock, and prior to certain other actions that are deemed pursuant to regulations of the Federal Reserve to constitute control. In addition, North Carolina law requires the approval of the Commissioner prior to acquiring control of a North Carolina savings bank.

DESCRIPTION OF CAPITAL STOCK

The following is a brief description of the material terms of the capital stock to be sold in the offering. This summary does not purport to be complete in all respects. This description is subject to and qualified in its entirety by reference to the North Carolina Business Corporation Act (“NCBCA”), federal law, our Articles, and our Bylaws, copies of which have been filed with the SEC and are also available upon request from us. See “Where You Can Find Additional Information” on page.

General

Our Articles authorize the issuance of 50,000,000 shares of common stock, no par value per share, and 10,000,000 shares of preferred stock, no par value per share. We expect that our shares of common stock will be listed for trading on the NASDAQ Global Market under the symbol ,“ENFC,” subject to completion of the offering and compliance with certain conditions, including the presence of at least three registered and active market makers. Raymond James & Associates, Inc.Sandler O’Neill has advised us that it intends to make a market in shares of our common stock following the offering, but it is under no obligation to do so or to continue to do so once it begins. While we will attempt, before completion of the offering, to obtain commitments from at least two other broker-dealers to make a market in shares of our common stock, there can be no assurance that we will be successful in obtaining such commitments.

We currently expect to issue up to 5,750,0004,945,000 shares of common stock in the offering. We will not issue shares of preferred stock in the offering. Each share of our common stock will have the same relative rights as, and will be identical in all respects to, each other share of common stock. Upon payment of the subscription price for the common stock, in accordance with the plan of conversion, all of the shares of common stock will be duly authorized, fully paid and nonassessable. Our Articles, subject to certain limitations, authorize our Board of Directors, from time to time by resolution and without further shareholder action, to provide for the issuance of shares of preferred stock, in one or more series, and to fix the designation, powers, preferences and other rights of the shares and to fix the qualifications, limitations and restrictions thereof.

The shares of common stock will represent nonwithdrawable capital, will not be an account of an insurable type, and will not be insured by the FDIC or any other government agency.

Common Stock

Pre-emptive Rights; Redemption Rights; Terms of Conversion; Sinking Fund and Redemption Provision.Our common stock has no preemptive rights, redemption rights, conversion rights, sinking fund or redemption provisions.

Voting Rights.Each holder of common stock is entitled to one vote for each share held of record on all matters submitted to a vote of the shareholders. Shareholders are not entitled to cumulate their votes for the election of directors. Directors shall be elected by a majority of the votes cast; provided, however, that in the event two or more nominees are presented for election to the same directorship, the nominee receiving a plurality of the votes cast shall be deemed elected to the directorship.

In the first election of directors following the conversion, and in all elections thereafter, that the total number of directors is nine or more, the directors shall be divided into three classes, as nearly equal as possible in number as may be, to serve in the first instance for terms of one, two and three years, respectively, from the date such class of directors takes office or until their earlier death, resignation, retirement, removal or disqualification or until their successors shall be elected and shall qualify. Thereafter the successors in each class of directors shall be elected for terms of three years or until their earlier death, resignation, retirement, removal, or disqualification or until their successors shall be elected and shall qualify. In the event of any increase or decrease in the number of directors at a time that the directors are so classified, the additional or eliminated directorships shall be classified or chosen so that all classes of directors shall remain or become as nearly equal as possible in number. At all times that the number of directors is less than nine, each director shall be elected to a term ending as of the next succeeding annual meeting of shareholders or until his or her earlier death, resignation, retirement, removal or disqualification or until his or her successor shall be elected and shall qualify.

Limitation on Voting Rights.Our Articles provide that until May, 2014,for a period of three years following the conversion, except with the prior approval of our Board of Directors by the affirmative vote of at least 75% of the whole Board, in no event shall any record owner of shares of common stock that are beneficially owned, directly or indirectly, by a person owning in excess of 10% of the then-outstanding shares of common stock, be entitled to vote any of the shares of common stock held in excess of the 10% limit.

This provision is designed to satisfy the Federal Reserve regulations which provide that for a period of three years following the date of the completion of the conversion, no person, acting singly or together with associates in a group of persons acting in concert, may directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10% of a class of Entegra’s equity securities without the prior written approval of the Federal Reserve, and restricts the voting rights of any person who exceeds the 10% threshold.

Liquidation Rights.In the event of any liquidation, dissolution or winding up of the Bank, we would be entitled, as the holder of 100% of the Bank’s capital stock, to receive all of the assets of the Bank available for distribution, after the payment or provision for payment of all debts and liabilities of the Bank, including all deposit accounts and accrued interest thereon, and after any required distribution from the Bank’s liquidation account to Eligible Account Holders and Supplemental Eligible Account Holders. In the event of our liquidation, dissolution or winding up, our shareholders would be entitled to receive, after the payment or provision for payment of all of our debts and liabilities, including but not limited to our outstanding subordinated debentures, all of our remaining assets available for distribution. If preferred stock is issued, holders of preferred stock may have a priority over the holders of our common stock in the event of liquidation, dissolution or winding up.

Dividend Rights.Holders of our common stock are entitled to receive ratably such dividends as may be declared by our Board of Directors out of legally available funds. The ability of our Board of Directors to declare and pay dividends on our common stock is subject to the terms of applicable North Carolina law, banking regulations, the MemorandaRegulatory Agreements and our outstanding subordinated debentures as described in “Our Policy Regarding

Dividends” on page     . The Written Agreement prohibits us from paying any dividends, except with the prior approval of the FRB. See “Supervision and Regulation – Regulatory Agreements” on page     . Our principal source of income is dividends that are declared and paid by the Bank, on our capital stock. Therefore, our ability to pay dividends is dependent upon the receipt of dividends from the Bank. North Carolina stock savings banks, such as the Bank, are subject to legal limitations on the amounts of dividends they are permitted to pay. The Bank may not pay dividends if, after making such distribution, it would become, or if it already is, “undercapitalized” (as such term is defined in the applicable law and regulations) or such transaction would reduce the net worth of the Bank to an amount which is less than the minimum amount required by applicable federal and state regulations. The Bank MOUConsent Order prohibits the Bank from paying any dividends, except with the prior approval of the Bank Supervisory Authorities. See “– Memoranda of Understanding”“Supervision and Regulation – Regulatory Agreements” on page. In addition, the Bank is not permitted to declare or pay a cash dividend if the effect thereof would be to cause its net worth to be reduced below the amount required for the liquidation account established in connection with the proposed conversion. Also, we may not pay dividends on our capital stock if we are in default or have elected to defer payments of interest under our subordinated debentures. Pursuant to Federal Reserve regulations, we may not make a distribution that would constitute a return of capital during the three years following the completion of the conversion and offering. The declaration and payment of future dividends to holders of our common stock will also depend upon our earnings and financial condition, the capital requirements of our subsidiaries, regulatory conditions and other factors as our Board of Directors may deem relevant.

Transfer Agent and Registrar.The transfer agent and registrar for our common stock is Registrar and Transfer Company, Cranford, New Jersey.

Preferred Stock

None of the shares of our authorized preferred stock will be issued as part of the offering or the conversion. Our Articles authorize our Board of Directors, from time to time by resolution and without further shareholder action, to provide for the issuance of shares of preferred stock, in one or more series, and to fix the designation, powers, preferences and other rights of the shares and to fix the qualifications, limitations and restrictions thereof.

EXPERTS

Our Consolidated Financial Statements as of December 31, 2010,2013, and 20092012 included in this prospectus and in the registration statement have been so included in reliance upon the report of Dixon Hughes Goodman LLP, an independent registered public accounting firm, appearing elsewhere herein and in the registration statement, given on the authority of said firm as experts in auditing and accounting.

RP Financial has consented to the publication herein of the summary of its report setting forth its opinion as to the estimated pro forma market value of the shares of common stock upon completion of the conversion and offering and its letter with respect to subscription rights.

LEGAL MATTERS

Our counsel, Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P., has issued us its opinions regarding the legality of the common stock and the federal and North Carolina state income tax consequences of the conversion. Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P. has consented to the references in this prospectus to its opinions. Certain legal matters will be passed upon for Raymond James & Associates, Inc.Sandler O’Neill by Kilpatrick Townsend & Stockton LLP.

REGISTRATION REQUIREMENTS

In connection with the offering, we will register our common stock under Section 12(b) of the Exchange Act and, upon such registration, we will become subject to the proxy solicitation rules, reporting requirements and restrictions on common stock purchases and sales by our directors, officers and greater than 10% shareholders, the annual and periodic reporting and certain other requirements of the Exchange Act. Under the plan of conversion, we have undertaken that we will not terminate such registration for a period of at least three years following the offering.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

We have filed with the SEC a registration statement under the Securities Act of 1933, as amended, with respect to the shares of common stock offered hereby. As permitted by the rules and regulations of the SEC, this prospectus does not contain all the information set forth in the registration statement. Such information, including the appraisal report which is an exhibit to the registration statement, can be examined without charge at the public reference facilities of the SEC located at 100 F Street, N.E., Washington, D.C. 20549, and copies of such material can be obtained from the SEC at prescribed rates. The SEC telephone number is 1-800-SEC-0330. In addition, the SEC maintains a web site (http://www.sec.gov)(www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC, including us. The statements contained in this prospectus as to the contents of any contract or other document filed as an exhibit to the registration statement are, of necessity, brief descriptions of the material terms of, and should be read in conjunction with, such contract or document.

We have filed with the Commissioner and the Federal Reserve applications for approval to become a bank holding company, of our change in control and the change in control of Bancorp and the Bank and the merger of Bancorp into Entegra that will occur in connection with the plan of conversion. This prospectus omits certain information contained in these applications. These applications may be examined at the offices of the Commissioner and the Federal Reserve, respectively. Our plan of conversion is also available, upon request, at each of our branch offices.

In connection with the offering, we will register our common stock under Section 12(b)

MACON BANCORP AND SUBSIDIARIES

Consolidated Financial Statements

December 31, 2013, 2012 and 2011

(with Report of Independent Registered

Public Accounting Firm thereon)

F-(i)


MACON BANCORP AND SUBSIDIARIES

Table of the Exchange ActContents

Years Ended December 31, 2013, 2012 and upon such registration, we will become subject to the proxy solicitation rules, reporting requirements and restrictions on common stock purchases and sales by our directors, officers and greater than 10% shareholders, the annual and periodic reporting and certain other requirements of the Exchange Act. Under the plan of conversion, we have undertaken that we will not terminate such registration for a period of at least three years following the offering.

Index to Consolidated Financial Statements2011

 

Page

Report of Independent Registered Public Accounting Firm

F-1
Consolidated Financial Statements

Consolidated Balance Sheets

   F-2  

Consolidated Balance SheetsStatements of Operations

   F-3  

Consolidated Statements of Comprehensive Income (Loss)

   F-4  

Consolidated Statements of Equity and Comprehensive Income (Loss)

   F-5  

Consolidated Statements of Cash Flows

   F-6  

Notes to Consolidated Financial Statements

   F-8  

F-(ii)


LOGO

ReportREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Independent Registered Public Accounting FirmDirectors

BOARD OF DIRECTORSMacon Bancorp and Subsidiaries

MACON BANCORP AND SUBSIDIARYFranklin, North Carolina

We have audited the accompanying consolidated balance sheetsfinancial statements of Macon Bancorp and Subsidiarysubsidiaries (the “Company”) which comprise the consolidated balance sheets as of December 31, 20102013 and 2009,2012, and the related consolidated statements of operations, comprehensive income (loss), equity, and comprehensive income (loss) and cash flows for each of the years in the three-yearthree year period ended December 31, 2010.2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits 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. AnThe company is not required to have, nor were we engaged to perform, an audit includesof its internal control over financial reporting. Our audit 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’scompany’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 provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Macon Bancorp and Subsidiarysubsidiaries as of December 31, 20102013 and 2009,2012, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010,2013, in conformity with accounting principles generally accepted in the United States of America.

/s/ Dixon Hughes Goodman LLP

(successor to Goodman & Company LLP; formerly Dixon Hughes PLLC)

Atlanta, Georgia

March 21, 201114, 2014

LOGO

MACON BANCORP AND SUBSIDIARYSUBSIDIARIES

Consolidated Balance Sheets

(in thousands)

 

  (Unaudited)
March 31,
 December 31,   December 31, 
  2011 2010   2009   2013 2012 
Assets        

Cash and due from banks

  $5,773   $7,531    $8,727    $9,080   $8,161  

Interest-earning deposits

   14,517    10,517     25,617     25,236   17,201  
             

 

  

 

 

Cash and cash equivalents

   20,290    18,048     34,344     34,316    25,362  
           

Certificate of deposit

   400    400     400  

Securities available for sale

   154,803    216,797     193,577  

Loans receivable, net

   667,714    698,309     753,966  

Investments -available for sale

   155,484    131,091  

Investments—held to maturity (Fair value of $20,098 at December 31, 2013)

   20,988    —    

Loans held for sale

   510    210     302     5,688    745  

Office properties and equipment, net

   14,248    14,461     15,339  

Loans receivable

   521,874    560,724  

Allowance for loan losses

   (14,251  (14,874

Fixed assets, net

   13,006    13,214  

Real estate owned

   23,491    21,511     22,829     10,506    19,755  

Federal Home Loan Bank stock, at cost

   10,979    10,979     12,288  

Federal Home Loan Bank stock

   2,724    2,437  

Interest receivable

   3,605    4,293     4,787     2,673    2,682  

Bank owned life insurance

   18,476    18,315     17,701     19,961    19,479  

Other

   18,329    18,454     23,004  
           

Net deferred tax asset

   4,210    4,210  

Real estate held for investment

   2,489    —    

Mortgage servicing rights

   1,883    1,908  

Other assets

   3,003    3,206  
  

 

  

 

 

Total assets

  $932,845   $1,021,777    $1,078,537    $784,554   $769,939  
             

 

  

 

 
Liabilities and Equity        

Liabilities:

        

Deposits:

     

Noninterest-bearing

  $52,225   $50,858    $52,502  

Interest-bearing

   729,910    747,561     737,906  
           

Total deposits

   782,135    798,419     790,408  
           

Deposits

  $684,226   $675,098  

Federal Home Loan Bank advances

   65,900    128,400     178,400     40,000    25,000  

Junior Subordinated Debentures

   14,433    14,433     14,433  

Accrued expenses and other liabilities

   14,047    14,557     13,665  

Junior subordinated notes

   14,433    14,433  

Post employment benefits

   10,199    10,868  

Accrued interest payable

   2,023    1,464  

Other liabilities

   1,155    782  
             

 

  

 

 

Total liabilities

   876,515    955,809     996,906     752,036    727,645  
             

 

  

 

 

Commitments and contingencies

     

Commitments and contingencies (Note 21)

   

Equity:

        

Retained earnings, substantially restricted

   56,559    65,456     79,714     39,994    40,409  

Accumulated other comprehensive income (loss)

   (229  512     1,917     (7,476  1,885  
             

 

  

 

 

Total equity

   56,330    65,968     81,631     32,518    42,294  
             

 

  

 

 

Total liabilities and equity

  $932,845   $1,021,777    $1,078,537    $784,554   $769,939  
             

 

  

 

 

SeeThe accompanying notes toare an integral part of these consolidated financial statements.

MACON BANCORP AND SUBSIDIARYSUBSIDIARIES

Consolidated Statements of Income (loss)Operations

(in thousands)

 

  (Unaudited)
Three Months Ended
March 31,
 Years Ended December 31,   Years Ended December 31, 
  2011 2010 2010 2009 2008   2013 2012 2011 

Interest income:

          

Interest and fees on loans

  $8,890   $10,618   $40,653   $46,744   $55,110    $27,231   $30,515   $34,106  

Taxable Securities

   1,012    1,491    5,046    7,570    6,866  

Taxable securities

   3,447   2,930   3,736  

Tax-exempt securities

   383    398    1,552    1,636    1,411     370   636   1,512  

Interest-earning deposits

   7    6    34    48    807     30   17   2  

FHLB and Other

   22    8    41    22    531  

Other interest earning assets

   179   176   127  
                  

 

  

 

  

 

 

Total interest and dividend income

   10,314    12,521    47,326    56,020    64,725     31,257    34,274    39,483  
                  

 

  

 

  

 

 

Interest expense:

          

Deposits

   3,018    3,722    13,865    16,684    21,801     5,826    7,883    11,204  

Interest on FHLB

   1,110    1,678    6,130    8,837    10,483  

Junior Subordinated Debentures and other borrowings

   115    108    456    594    1,012  

FHLB advances

   672    1,238    2,899  

Junior subordinated notes

   490    514    469  
                  

 

  

 

  

 

 

Total interest expense

   4,243    5,508    20,451    26,115    33,296     6,988    9,635    14,572  
                  

 

  

 

  

 

 

Net interest income

   6,071    7,013    26,875    29,905    31,429     24,269    24,639    24,911  

Provision for loan losses

   9,765    3,849    18,926    21,851    6,210     4,358    7,878    24,116  
                  

 

  

 

  

 

 

Net interest income (loss) after provision for loan losses

   (3,694  3,164    7,949    8,054    25,219  
                

Net interest income after provision for loan losses

   19,911    16,761    795  
  

 

  

 

  

 

 

Noninterest income:

          

Mortgage-banking income:

      

Service income, net

   (41  (16  (88  (430  (876

Gain on sale of mortgage loans

   172    221    1,131    2,766    1,392  

Customer service fees

   633    724    3,037    3,286    3,852  

Servicing income, net

   (126  (26  405  

Gain on sale of loans

   2,407    1,005    555  

Gain on sale of investments

   1,633    842    1,665    1,416    847     358    3,294    1,635  

Bank Owned Life Insurance

   174    171    666    675    679  

Overdraft fees

   1,139    1,419    1,465  

ATM and debit fees

   1,009    967    765  

Bank owned life insurance

   543    595    683  

Other

   81    64    278    579    518     1,059    960    1,246  
                  

 

  

 

  

 

 

Total noninterest income

   2,682    2,006    6,689    8,292    6,412     6,389    8,214    6,349  
  

 

  

 

  

 

 

Noninterest expenses:

          

Compensation and employee benefits

   2,555    2,734    10,410    10,972    12,663     11,428    10,057    10,458  

Loss on real estate owned

   845    827    5,127    8,690    837  

Net occupancy expense

   626    652    2,645    2,692    2,819  

Deposit insurance premiums

   411    332    1,355    1,774    543  

Net occupancy

   2,507    2,373    2,475  

Federal deposit insurance

   1,700    1,652    1,679  

Professional and advisory

   547    1,000    2,189  

Data processing

   318    443    1,685    1,605    1,582     893    751    1,134  

Real estate owned expense

   806    112    870    738    237  

FHLB advance prepayment fees

   1,412    —      —      —      —    

Real estate owned operations

   1,356    2,156    2,332  

Real estate owned valuation

   4,093    2,089    6,042  

Loss on sale of real estate owned

   163    1,203    639  

Other

   912    770    3,099    3,753    3,525     3,553    3,772    4,802  
                  

 

  

 

  

 

 

Total noninterest expenses

   7,885    5,870    25,191    30,224    22,206     26,240    25,053    31,750  
                  

 

  

 

  

 

 

Income (loss) before taxes

   (8,897  (700  (10,553  (13,878  9,425     60    (78  (24,606

Income tax expense (benefit)

   —      (463  3,705    (6,091  2,964     475    (1,011  1,374  
                  

 

  

 

  

 

 

Net income (loss)

  $(8,897 $(237 $(14,258 $(7,787 $6,461    $(415 $933   $(25,980
                  

 

  

 

  

 

 

SeeThe accompanying notes toare an integral part of these consolidated financial statements.

MACON BANCORP AND SUBSIDIARYSUBSIDIARIES

Consolidated Statements of Equity and Comprehensive Income (Loss)

(in thousands)

For the Three Months Ended March 31, 2011 (unaudited)

   Years Ended December 31, 
   2013  2012  2011 

Net income (loss)

  $(415  933    (25,980

Other comprehensive income (loss):

    

Change in unrealized holding gains (losses) on securities available for sale

   (9,431  1,134    5,041  

Reclassification adjustment for securities gains realized in net income (loss)

   (358  (3,294  (1,635

Amortization of unrealized loss on securities transferred to HTM

   34    —      —    

Change in deferred tax valuation allowance attributable to unrealized gains (losses) on investment securities available for sale

   (3,479  (816  1,435  
  

 

 

  

 

 

  

 

 

 

Other comprehensive income (loss), before tax

   (13,234  (2,976  4,841  

Income tax effect related to items of other comprehensive income

   3,873    853    (1,345
  

 

 

  

 

 

  

 

 

 

Other comprehensive income (loss), after tax

   (9,361  (2,123  3,496  
  

 

 

  

 

 

  

 

 

 

Comprehensive income (loss)

  $(9,776 $(1,190 $(22,484
  

 

 

  

 

 

  

 

 

 

and the Years Ended December 31, 2010, 2009, and 2008

   Retained
Earnings
  Accumulated
Other
Comprehensive
Income (Loss)
  Total 

Balance, December 31, 2007

  $80,965   $115   $81,080  

Comprehensive income:

 ��  

Net income

   6,461    —      6,461  

Adjustment to retained earnings for implementation of EITF06-4

   (425  —      (425

Adjustment to retained earnings for implementation of FIN 48

   500    —      500  

Unrealized gains on investments available for sale, net of income taxes

   —      1,128    1,128  
       

Comprehensive income

     7,664  
             

Balance, December 31, 2008

  $87,501   $1,243   $88,744  
             

Comprehensive income:

    

Net loss

   (7,787  —      (7,787

Other comprehensive income:

    

Unrealized gains on investments available for sale, net of income taxes

   —      674    674  
       

Comprehensive income (loss)

     (7,113
             

Balance, December 31, 2009

  $79,714   $1,917   $81,631  
             

Comprehensive income:

    

Net loss

  $(14,258 $—     $(14,258

Other comprehensive income:

    

Unrealized losses on investments available for sale, net of income taxes

   —      (1,405  (1,405
       

Comprehensive income (loss)

     (15,663
             

Balance, December 31, 2010

  $65,456   $512   $65,968  
             

Comprehensive income:

    

Net loss

  $(8,897 $—     $(8,897

Other comprehensive income:

    

Unrealized losses on investments available for sale, net of income taxes

   —      (741  (741
       

Comprehensive income (loss)

     (9,638
             

Balance, March 31, 2011

  $56,559   $(229 $56,330  
             

SeeThe accompanying notes toare an integral part of these consolidated financial statements.

MACON BANCORP AND SUBSIDIARYSUBSIDIARIES

Consolidated Statements of Equity

(in thousands)

Years Ended December 31, 2013, 2012, and 2011

   Retained
Earnings
  Accumulated
Other
Comprehensive
Income (loss)
  Total 

Balance, December 31, 2010

  $65,456   $512   $65,968  
  

 

 

  

 

 

  

 

 

 

Net loss

   (25,980  —      (25,980

Other comprehensive income (loss), net of tax

   —      3,496    3,496  
  

 

 

  

 

 

  

 

 

 

Balance, December 31, 2011

  $39,476   $4,008   $43,484  
  

 

 

  

 

 

  

 

 

 

Net income

   933    —      933  

Other comprehensive income (loss), net of tax

   —      (2,123  (2,123
  

 

 

  

 

 

  

 

 

 

Balance, December 31, 2012

  $40,409   $1,885   $42,294  
  

 

 

  

 

 

  

 

 

 

Net loss

   (415  —      (415

Other comprehensive income (loss), net of tax

   —      (9,361  (9,361
  

 

 

  

 

 

  

 

 

 

Balance, December 31, 2013

  $39,994   $(7,476 $32,518  
  

 

 

  

 

 

  

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

MACON BANCORP AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(in thousands)

 

   (Unaudited)
Three Months Ended
March 31,
  Years Ended December 31, 
   2011  2010  2010  2009  2008 

Operating activities:

      

Net income (loss)

  $(8,897 $(237 $(14,258 $(7,787 $6,461  

Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:

      

Depreciation

   228    242    934    1,248    1,033  

Security amortization/accretion, net

   631    382    2,178    2,689    290  

Provision for loan losses

   9,765    3,849    18,926    21,151    6,210  

Provision for real estate owned

   782    810    4,365    7,520    779  

Deferred income tax (benefit) expense

   —      2,377    8,452    (4,048  (3,079

Net increase in deferred loan fees

   134    81    320    284    581  

Gain on sales of securities available for sale

   (1,633  (842  (1,665  (1,416  (847

Capitalization of interest on bank owned life insurance

   (161  (157  (614  (627  (624

Gains on sale of mortgage loans

   (172  (221  (1,131  (2,766  (1,392

Net realized loss on real estate owned

   63    17    762    1,170    58  

Loans originated for sale, net

   (6,640  (8,108  (36,293  (98,724  (72,294

Proceeds from sale of loans originated for sale

   6,512    8,460    37,516    102,272    75,870  

Increase in originated servicing rights, net

   163    126    (476  419    539  

Net change in operating assets and liabilities:

      

Interest receivable

   688    49    494    895    701  

Other assets

   932    (2,529  1,502    (4,122  (49

Accrued expenses and other liabilities

   (510  2,119    (4,127  (532  114  

Current income taxes

   (483  (2,000  913    (5,322  (135
                     

Net cash provided by operating activities

   1,402    4,418    17,798    13,004    14,216  

Investing activities:

      

Activity for investments available for sale:

      

Purchases

   (27,892  (42,051  (172,405  (101,514  (158,857

Maturities and principal repayments

   28,830    13,977    43,185    54,327    16,988  

Sales

   60,830    22,776    103,260    61,938    75,591  

Proceeds of certificates of deposit

   —      —      —      5,097    4,903  

Net (increase) decrease in loans

   16,370    9,708    24,426    (13,169  28,059  

Purchase of loans

   —      —      —      —      (24,081

Purchases of bank owned life insurance

   —      —      —      —      (5,820

Proceeds from sale of equipment

   10    8    25    107    46  

Proceeds from sale of real estate owned

   1,946    1,627    10,511    17,171    2,116  

Real estate cost capitalized

   (445  (1,182  (2,335  (3,287  (244

Purchase of office properties and equipment

   (25  (5  (81  (688  (1,900

Redemption of FHLB stock

   —      —      1,309    328    906  
                     

Net cash provided by (used in) investing activities

   79,624    4,858    7,895    20,310    (62,293
                     

Financing activities:

      

Net increase (decrease) in deposits

   (16,563  18,777    8,127    74,541    40,340  

Net decrease in collections and remittances, net on loans serviced for others

   279    214    (116  (138  (231

Proceeds from FHLB advances

   35,000    —      —      —      233,950  

Repayment of FHLB advances

   (97,500  (25,000  (50,000  (60,000  (255,500

Proceeds from FRB advances

   —      —      —      —      40,000  

Repayment of FRB advances

   —      —      —      (40,000  —    
                     

Net cash provided by (used in) financing activities

   (78,784  (6,009  (41,989  (25,597  58,559  
                     

Increase (decrease) in cash and cash equivalents

   2,242    3,267    (16,296  7,717    10,482  

Cash and cash equivalents, beginning of period:

   18,048    34,344    34,344    26,627    16,145  
                     

Cash and cash equivalents, end of period

  $20,290   $37,611   $18,048   $34,344   $26,627  
                     

See accompanying notes to consolidated financial statements.

   Years Ended December 31, 
   2013  2012  2011 

Operating activities:

    

Net income (loss)

  $(415  933    (25,980

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Depreciation

   848    805    919  

Security amortization/(accretion), net

   1,506    1,972    1,926  

Provision for loan losses

   4,358    7,878    24,116  

Provision for real estate owned

   4,093    2,089    6,042  

Deferred income tax (benefit) expense

   429    (440  1,374  

Net increase (decrease) in deferred loan fees

   (232  132    294  

Gain on sales of securities available for sale

   (358  (3,294  (1,635

Income on bank owned life insurance

   (482  (536  (628

Gains on sale of mortgage loans

   (2,407  (1,005  (555

Net realized loss on real estate owned

   163    1,203    639  

Loans originated for sale

   (65,635  (40,815  (18,900

Proceeds from sale of loans originated for sale

   63,099    41,075    19,665  

Net change in operating assets and liabilities:

    

Interest receivable

   9    505    1,106  

Mortgage servicing rights

   25    406    219  

Other assets

   203    2,252    1,740  

Postemployment benefits

   (669  (669  (909

Accrued interest payable

   559    157    (37

Other liabilities

   373    69    (54

Current income taxes

   —      (179  4,166  
  

 

 

  

 

 

  

 

 

 

Net cash provided by operating activities

  $5,467    12,538    13,508  
  

 

 

  

 

 

  

 

 

 

MACON BANCORP AND SUBSIDIARYSUBSIDIARIES

Consolidated Statements of Cash Flows, (Continued)Continued

(in thousands)

 

  (Unaudited)
Three Months  Ended
March 31,
 Years Ended December 31,   Years Ended December 31, 
  2011 2010 2010 2009   2008   2013 2012 2011 

Investing activities:

    

Activity for investments available for sale:

    

Purchases

  $(113,810 (118,361 (126,188

Maturities and principal repayments

   21,122   29,389   27,818  

Sales

   36,404   147,826   127,618  

Net decrease in loans

   28,041   26,872   60,732  

Proceeds from sale of real estate owned

   8,671   13,245   15,269  

Real estate cost capitalized

   (118 (1,355 (2,941

Purchase of fixed assets

   (642 (312 (165

(Redemption) purchase of FHLB stock

   (287 4,053   4,489  
  

 

  

 

  

 

 

Net cash (used) provided in investing activities

  $(20,619  101,357    106,632  
  

 

  

 

  

 

 

Financing activities:

    

Net increase (decrease) in deposits

  $9,128    (75,358  (47,898

Net increase (decrease) in escrow deposits

   (22  (376  311  

Proceeds from FHLB advances

   15,000    —      4,000  

Repayments of FHLB advances

   —      (27,400  (80,000
  

 

  

 

  

 

 

Net cash provided by (used in) financing activities

  $24,106    (103,134  (123,587
  

 

  

 

  

 

 

Increase (decrease) in cash and cash equivalents

   8,954    10,761    (3,447

Cash and cash equivalents, beginning of year

   25,362    14,601    18,048  
  

 

  

 

  

 

 

Cash and cash equivalents, end of year

  $34,316    25,362    14,601  
  

 

  

 

  

 

 

Supplemental disclosures of cash flow information:

           

Cash paid during the year for:

           

Interest on deposits and other borrowings

  $4,578   $5,444   $20,965   $28,083    $33,613    $6,429    9,987    15,071  

Income taxes

   —      —      572    576     5,431     43    —      —    
                   

 

  

 

  

 

 

Noncash investing and financing activities:

           

Real estate acquired in satisfaction of mortgage

  $6,061   $4,196   $16,581   $46,565    $7,233  

Real estate acquired in satisfaction of mortgage loans

  $8,651    21,295    20,610  

Loans originated for disposition of real estate owned

  $1,735   $1,553   $4,596   $6,693    $1,192     2,591    3,188    6,282  

Adjustments for implementation of FIN 48

  $—     $—     $—     $—      $500  

Adjustments for implementation of EITF 06-4

  $—     $—     $—     $—      $(425

Other comprehensive income, net of taxes

  $(741 $(406 $(1,405 $674    $1,128  
                 

Transfer of investment securities available for sale to held to maturity

   20,954    —      —    

Transfer of real estate owned to real estate held for investment

   2,500    —      —    

SeeThe accompanying notes toare an integral part of these consolidated financial statements.

MACON BANCORP AND SUBSIDIARYSUBSIDIARIES

Notes to Consolidated Financial Statements

(allDollar amounts in thousands)

March 31, 2011 and 2010 (unaudited) andthousands, except as noted)

December 31, 20102013, 2012 and 20092011

 

1.Organization

Macon Bancorp (the “Holding Company”)(Holding Company) is the parenta mutual holding company for Macon Bank, Inc. (the “Bank”)(Bank), a state-chartered stock savings bank. The Holding Company’s primary operation is its investment in the Bank. The Holding Company also owns the common stock of Macon Bancorp is organized as a mutual holding company. The consolidatedCapital Trust I (Trust), the issuing entity (the “Company”) financials are presented in the financial statements.

The Bank’s principal line of business is originating residential and nonresidential first mortgage loans.for certain trust preferred securities. The Bank has an inactivea wholly owned subsidiary, Macon Services, Inc., which owns an investment real estate property. The consolidated entity (Company) financials are presented in these financial statements.

The Bank operates as a community-focused retail bank, originating primarily real estate based mortgage, consumer and commercial loans and accepting deposits from consumers and small businesses.

 

2.Summary of Significant Accounting Policies

The accounting and reporting policies of the Company conform, in all material respects, to U.S. generally accepted accounting principles, generally accepted in the United States of Americaor GAAP, and to general practices within the banking industry. For the unaudited consolidated financial statements for the three-month periods ended March 31, 2011 and 2010, all adjustments necessary for a fair presentation have been made, and such adjustments were normal and recurring in nature. The following summarizesummarizes the more significant of these policies and practices.

Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change, in the near term, relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for loan losses and the valuation of foreclosed real estate, management obtains independent appraisals for significant properties.

MACON BANCORP AND SUBSIDIARYSUBSIDIARIES Notes to Consolidated Financial Statements, Continued

 

Principles of Consolidation - The accompanying consolidated financial statements include the accounts of the Holding Company, the Bank, and its wholly owned subsidiary. The accounts of the Trust are not consolidated with the Company. In consolidation all significant intercompany accounts and transactions have been eliminated.

Reclassification – Certain amounts in the prior years’ financial statements have been reclassified to conform to the current year’s presentation. The reclassifications had no significant effect on our results of operations or financial condition.

Cash and Cash Equivalents - Cash and cash equivalents as presented in the Consolidated Balance Sheets and Consolidated Statements of Cash Flows include demandvault cash and timedemand deposits at other institutions (with original maturities of 90 days or less), federal funds soldincluding the Federal Home Loan Bank (FHLB) and other short-term investments. Generally, federal funds are purchased and sold for one-day periods. At times, the Company places deposits with high credit quality financial institutions in amounts, which may be in excess of federally insured limits. The Company had no deposits in excess of insured limits at FDIC insured institutions at December 31, 2010.Federal Reserve Bank (FRB). Depository institutions are required to maintain reserve and clearing balances with the Federal Reserve Bank (“FRB”)FRB. The Company’s required reserve balances with the FRB were $410 and $350 at December 31, 2013 and 2012, respectively, and were satisfied entirely through vault cash balances.

Securities – We determine the appropriate classification of securities at the time of purchase. Available for sale securities represent those securities that that we intend to hold for an indefinite period of time, but that may be sold in response to changes in interest rates, prepayment risk, liquidity needs or other factors. Such securities are carried at fair value with net unrealized gains and losses deemed to be temporary, reported as a component of other comprehensive income, net of tax.

Held to maturity securities represent those securities that we have the positive intent and ability to hold to maturity and are carried at amortized cost.

Realized gains and losses on the sale of securities and other-than-temporary impairment (OTTI) charges are recorded as a component of noninterest income in the Consolidated Statements of Operations. Realized gains and losses on the sale of securities are determined using the specific-identification method. Bond premiums are amortized to the call date and bond discounts are accreted to the maturity date, both on a level yield basis.

We perform a quarterly review of our securities to identify those that may indicate OTTI. Our policy for OTTI within the debt securities portfolio is based upon a number of factors, including, but not limited to, the length of time and extent to which the estimated fair value has been less than cost, the financial condition of the underlying issuer and the ability of the issuer to meet contractual obligations. Other factors include the likelihood of the security’s ability to recover any decline in its estimated fair value and whether management intends to sell the security, or if it is more likely than not that management will be required to sell the investment security prior to the security’s recovery.

The Company reclassified certain of its securities from available for sale to held to maturity during the year ended December 31, 2013 in an effort to minimize the impact of future

MACON BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued

interest rates on accumulated other comprehensive income (loss). The Company haddifference between the book values and fair values at the date of the transfer will continue to be reported in a nominal amount restricted for this purposeseparate component of $25 thousand includedAccumulated Other Comprehensive Income, and will be amortized into income over the remaining life of the security as an adjustment of yield in cash and due from banksa manner consistent with the amortization of a premium. Concurrently, the revised book values of the transferred securities (represented by the market value on the consolidated balance sheet for March 31, 2011, December 31, 2010 and 2009. The Company had $14.5 million (unaudited) and $10.5 million on deposit atdate of transfer) are being amortized back to their par values over the Federal Home Loan Bankremaining life of Atlanta at March 31, 2011 and December 31, 2010, respectively.the security as an adjustment of yield in a manner consistent with the amortization of a discount.

Loans Held for Sale - The Bank periodically sells whole and/or participating interests in real estate loans. Mortgage loans– Loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or fair value. Net unrealized losses are recognized in a valuation allowance by charges to Gain on sale of loans income. When a loan is placed in the held-for-sale category, we stop amortizing the related deferred fees and costs. The remaining unamortized fees and costs are recognized as part of the cost basis of the loan at the time it is sold. Gains and losses on sales of loans held for sale are included in other noninterest income in the Consolidated Statements of Operations. Loans held for sale primarily represent loans on one-to-four family dwellings.

Mortgage loans held for sale are generally sold with the mortgage servicing rights retained by the Bank. The carrying value of mortgage loans sold is reduced by the cost allocated to the associated mortgage servicing rights based on relative fair values. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling pricedwellings and the carrying valueportion of the related mortgageSmall Business Administration loans sold.

Rate-Lock Commitments - The Bank enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. Accordingly, such commitments, along with any related fees received from potential borrowers, are recorded at fair value in derivative assets or liabilities, if material, with changes in fair value recorded in the net gain or loss on sale of mortgage loans. Fair value is based on fees currently charged to enter into similar agreements, and for fixed-rate commitments also considers the difference between current levels of interest rates and the committed rates.sold.

MACON BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements, Continued

Loans Receivable - The Bank grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by loans in western North Carolina and northern Georgia. The ability of the Bank’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in this area.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for the allowance for loan losses, loans in process,unamortized premiums and discounts, and any net deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of interest income over the related loanrespective lives of the loans using the interest method.method without consideration of anticipated prepayments.

Generally, consumer loans are charged down to their estimated collateral value after reaching 90 days past due. The number of days past due is determined by the amount of time from when the payment was due based on contractual terms. Commercial loans are charged off as management becomes aware of facts and circumstances that raise doubt as to the collectability of all or a portion of the principal and when we believe a confirmed loss exists.

The Company began originating and selling the guaranteed portion of small business administration (SBA) loans into the secondary market during the year ended December 31, 2013. When the Company retains the right to service a sold SBA loan, the previous carrying amount is allocated between the guaranteed portion of the loan sold, the unguaranteed portion of the loan retained and the retained SBA servicing right based on their relative fair values on the date of transfer.

Nonaccrual LoansThe accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent or when it becomes impaired, whichever occurs first, unless the creditloan is well secured and in the process of collection. All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. PaymentsInterest payments received

MACON BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued

on thesenonaccrual loans are generally applied as a direct reduction to the principal outstanding until qualifying for return to accrual.accrual status. Interest payments received on nonaccrual loans may be recognized as income on a cash basis if recovery of the remaining principal is reasonably assured. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Interest payments applied to principal while the loan was on nonaccrual may be recognized in income over the remaining life of the loan after the loan is returned to accrual status.

The BankFor loans modified in a troubled debt restructuring, the loan is generally placed on non-accrual until there is a period of satisfactory payment performance by the borrower (either immediately before or after the restructuring), generally defined as six months, and the ultimate collectability of all amounts contractually due is not in doubt.

Troubled Debt Restructurings (TDR) – In situations where, for economic or legal reasons related to a borrower’s financial difficulties, we grant a concession, for other than an insignificant period of time, to the borrower that we would not otherwise grant, the related loan is classified as a TDR. We strive to identify borrowers in financial difficulty early and work with them to modify to more affordable terms before their loan reaches nonaccrual status. These modified terms generally include extensions of maturity dates at a stated interest rate lower than the current market rate for a new loan with similar risk characteristics, reductions in contractual interest rates, periods of interest only payments, and principal deferment. While unusual, there may be instances of loan principal forgiveness. We also may have borrowers classified as a TDR wherein their debt obligation has no unimpaired restructuredbeen discharged by a chapter 7 bankruptcy without reaffirmation of debt. We individually evaluate all substandard loans that experienced a modification of terms to determine if a TDR has occurred.

All TDRs are accountedconsidered to be impaired loans and will be reported as an impaired loan for in accordance with FASB ASC 310-40 Trouble Debt Restructuring by Creditors.

When any loan or portion thereof is classified Doubtful or Loss,the remaining life of the loan, unless the restructuring agreement specifies an interest rate equal to or greater than the rate that would be accepted at the time of the restructuring for a new loan with comparable risk and it is fully expected that the remaining principal and interest will be charged down or charged off againstcollected according to the Allowance for Loan Losses (ALLL). Loans are deemed Doubtful or Loss based on a variety of credit, collateral, documentation and other issues. When collateral is foreclosed or repossessed, any principal charge off related to that transaction based upon the most current appraisal or evaluation along with estimated sales expense is taken at that time.restructured agreement

Allowance for Loan Losses (ALL) - The allowance forALL reflects our estimates of probable losses inherent in the loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to operations. Loan losses are charged againstportfolio at the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

sheet date. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The methodology for determining the ALL has two main components: the evaluation of individual loans for impairment and the evaluation of certain groups of homogeneous loans with similar risk characteristics.

MACON BANCORP AND SUBSIDIARYSUBSIDIARIES Notes to Consolidated Financial Statements, Continued

 

A loan is considered impaired when based on current information and events, it is probable that the Bankwe will be unable to collect the scheduledall principal and interest payments of principal or interest when due according to the original contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are notWe individually evaluate all loans classified as impaired. Management determinessubstandard or nonaccrual greater than $350 for impairment. If the significance of payment delays and payment shortfalls onimpaired loan is considered collateral dependent, a case-by-case basis, taking into consideration all ofcharge-off is taken based upon the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fairappraised value of the collateralproperty (less an estimate of selling costs if foreclosure is anticipated). If the impaired loan is not collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures.

Loan Fees - Loan fees result from the origination of loans. Such fees and certain direct incremental costs related to origination of such loans are deferred (“net deferred loan fees”) and reflected asdependent, a reductionspecific reserve is established based upon an estimate of the carrying valuefuture discounted cash flows after consideration of loans. modifications and the likelihood of future default and prepayment.

The net deferred loan fees (or costs) are amortized using the interest method over the contractual livesallowance for homogenous loans consists of a base historical loss reserve and a qualitative reserve. The base historical loss reserve utilizes a weighted average historical loss rate of the loans. Unamortized net deferred loan fees on loans sold prior to maturity are credited to income at the time of sale.

Securities - The Company has identified their holdings in certain investment securities as available for sale. Book values on securities purchased and sold are recorded as of their trade date. Securities available for sale are reported at fair valuelast 16 quarters, with the balance of unrealized gains or losses reported, net of related income tax effects, as accumulated other comprehensive income until realized. Realized gains or losses on sales of securities availablelast four quarters weighted more heavily than the oldest four quarters. The loss rates for salethe base loss reserve are based onsegmented into 13 loan categories and contain loss rates ranging from approximately 1% to 14%.

The qualitative reserve adjusts the specific identification method. Premiums and discounts on the investment securities are amortized or accreted into income over the contractual terms of the securities using a level yield interest method.

Declinesweighted average loss rates utilized in the fair value of available-for-sale securities below their cost that are deemed to be other-than-temporary are reflected in income as realized losses. In estimating other-than-temporary impairment losses, management considers (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, and (3) the intent and ability of the Bank to retain its investmentbase loss reserve for trends in the issuerfollowing internal and external factors:

Non-accrual and classified loans

Collateral values

Loan concentrations

Economic conditions – including unemployment rates, building permits, and a regional economic index.

Qualitative reserve adjustment factors range from -10 basis points for a period of time sufficientfavorable trend to allow+30 basis points for any anticipated recovery in fair value.a highly unfavorable trend. These factors are subject to adjustment as economic conditions change.

MACON BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements, Continued

Real Estate OwnedFixed Assets - Real estate properties acquired through loan foreclosure are initially recorded at fair value at the date of foreclosure. Subsequent to foreclosure, real estate is recorded at the lower of carrying amount or fair value less estimated costs to sell (net realizable value). Valuations are periodically performed by management, and an allowance for losses is established by a charge to income if the carrying value of a property exceeds its estimated net realizable value.

Real estate property held for investment is carried at the lower of cost, including cost of property improvements incurred subsequent to acquisition less depreciation, or net realizable value. Costs relating to development and improvement of properties are capitalized, whereas costs relating to the holding of property are expensed.

Office Properties and Equipment - Land is stated at cost. Office properties and equipment are stated at cost less accumulated depreciation. Depreciation is recorded using the straight-line method for financial reporting purposes and accelerated methods for income tax purposes over the estimated useful lives of the assets ranging from four to 30 years. The cost of maintenance and repairs is charged to expense as incurred while expenditures greater than $500 dollars that materially increase property livesa property’s life are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in income. Leasehold improvements are amortized over the shorter of the asset’s useful life or the remaining lease term, including renewal periods when reasonably assured.

Real Estate Owned – Real estate properties acquired through loan foreclosure are initially recorded at the lower of the recorded investment in the loan or fair value less costs to sell. Losses arising from the initial foreclosure of property are charged against the ALL. Subsequent to foreclosure, real estate owned is recorded at the lower of carrying amount or

MACON BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued

fair value less estimated costs to sell. Valuations are periodically performed by management, but not less than annually, and an additional allowance for losses is established by a charge to Real estate owned valuation in the Consolidated Statements of Operations, if necessary.

Federal Home Loan Bank Stock (FHLB) - Investment in– FHLB stock of a Federal Home Loan Bank is required by law of every federally insured savings and loan or savings bank. The investment is carried at cost. No ready market existscost and evaluated for impairment based on the ultimate recoverability of the par value. The Company has evaluated its FHLB stock and concluded that it is not impaired because the FHLB Atlanta is currently paying cash dividends and redeeming stock at par. The FHLB requires members to purchase and hold a specified level of stock based upon on the members asset value, level of borrowings and participation in other programs offered. Stock in the FHLB is non-marketable and is redeemable at the discretion of the FHLB. Members do not purchase stock in the FHLB for the same reasons that traditional equity investors acquire stock in an investor-owned enterprise. Rather, members purchase stock to obtain access to the low-cost products and it has no quoted market value. Becauseservices offered by the FHLB. Unlike equity securities of traditional for-profit enterprises, the redemption provisionsstock of the FHLB does not provide its holders with an opportunity for capital appreciation because, by regulation, FHLB stock can only be purchased, redeemed and transferred at par value. Both cash and stock dividends are reported as income from taxable securities in the Consolidated Statements of Operations.

Bank estimates thatOwned Life Insurance (BOLI) – BOLI is recorded at its net cash surrender value. Changes in net cash surrender value are recognized in noninterest income in the Consolidated Statements of Operations.

Real Estate Held for InvestmentReal estate held for investment is initially recorded at fair value equals cost for this investmentvalue. Subsequently, the property is depreciated over its estimated useful life. Costs relating to development and that it was not impaired at March 31, 2011 or December 31, 2010.improvement of properties are capitalized, whereas holding costs are expensed as incurred.

Mortgage Servicing Rights (MSR) - Mortgage servicing assets– Effective January 1, 2012, the Company adopted the fair value model for accounting for its MSR’s. This change represented a change in accounting principle and has been accounted for retrospectively by reflecting prior amortization as change in fair value. Because fair value was less than amortized cost and had been properly reserved through a valuation allowance, there was no cumulative impact of adopting the fair value option.

The value of MSR’s are initially recognized as part of the fair value measurement of a derivative loan commitment. However, a separate assets whenMSR asset or liability is not recognized until the servicing rights are acquired through purchase or throughhave been contractually separated from the underlying loan by sale of financial assets. Generally, purchased servicing rights are capitalized at the cost to acquire the rights. For sales of mortgage loans, a portion of the cost of originating the loan with servicing retained. The MSR is allocated to the servicing right based on relativeestablished at estimated fair value. Fair value, is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculateswhich represents the present value of estimated future net servicing income. The valuation model incorporatescash flows, considering expected mortgage loan prepayment rates, discount rates, servicing costs and other economic factors, which are determined based on assumptions that a market participantsparticipant would use in estimating future net servicing income, such asutilize. The expected rate of mortgage loan prepayments is the cost to service,most significant factor driving the discount rate, the custodial earnings rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Capitalized servicing rights are reported in other assets and are amortized into noninterest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.

MACON BANCORP AND SUBSIDIARYSUBSIDIARIES Notes to Consolidated Financial Statements, Continued

 

Servicing assets are evaluated for impairment based uponvalue of MSRs. Increases in mortgage loan prepayments reduce estimated future net servicing cash flows because the life of the underlying loan is reduced. In determining the estimated fair value of MSRs, mortgage interest rates, which are used to determine prepayment rates, are held constant over the rightsestimated life of the portfolio. The Company periodically adjusts the recorded amount of its MSR’s to fair value as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is recognized through a valuation allowance for an individual tranche, to the extent that fair value is less than the capitalized amount for the tranche. If the Bank later determines that all or a portion of the impairment no longer exists for a particular tranche, a reduction of the allowance may be recorded as an increase to income.third party appraisal.

Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal (generally 25 basis points) or a fixed amount per loan, and are recorded as income when earned. The amortizationChanges in fair value of mortgage servicing rights isMSR’s are netted against loan servicing fee income.income and reported as Servicing income, net in the Consolidated Statements of Operations.

Derivative Financial Instruments – Interest Rate Lock Commitments and Forward Sale Contracts – In the normal course of business, we sell originated mortgage loans into the secondary mortgage loan market. We also offer interest rate lock commitments to potential borrowers. The commitments guarantee a specified interest rate for a loan if underwriting standards are met, but the commitment does not obligate the potential borrower to close on the loan. Accordingly, some commitments expire prior to becoming loans. We can encounter pricing risks if interest rates rise significantly before the loan can be closed and sold. As a result, forward sale contracts are utilized in order to mitigate this pricing risk. Whenever a customer desires an interest rate lock commitment, a mortgage originator quotes a secondary market rate guaranteed for that day by the investor. The interest rate lock is executed between the mortgagee and the Company and in turn a forward sale contract may be executed between the Company and an investor (generally FNMA). Both the interest rate lock commitment with the customer and the corresponding forward sale contract with the investor are considered derivatives, but are not accounted for using hedge accounting. As such, changes in the estimated fair value of the derivatives during the commitment period are recorded in current earnings and included in Gain on sale of loans in the Consolidated Statements of Operations. The fair value of the interest rate lock commitments and forward sale contracts are recorded as assets or liabilities and included in Other assets and Other liabilities in the Consolidated Balance Sheets.

Advertising Expense - Advertising costs are expensed as incurred. The Company’s advertising expenses were $279, $267 and $242 for the years ended December 31, 2013, 2012, and 2011, respectively.

Income Taxes - The Company utilizes– We estimate income tax expense based on amounts expected to be owed to the tax jurisdictions where we conduct business. On a quarterly basis, management assesses the reasonableness of our effective tax rate based upon our current estimate of the amount and components of net income, tax credits and the applicable statutory tax rates expected for the full year.

MACON BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued

Deferred income tax assets and liabilities are determined using the asset and liability method of computing income taxes.and are reported net in the Consolidated Balance Sheets. Under this method, the liability method,net deferred tax liabilities and assets are established for futureasset or liability is based on the tax return effects of temporarythe differences between the stated valuebook and tax basis of assets and liabilities for financial reporting purposes and their respectiverecognizes enacted changes in tax bases. The focus is on accruing the appropriate balance sheetrate and laws. When deferred tax assets are recognized, they are subject to a valuation allowance based on management’s judgment as to whether realization is more likely than not. In determining the need for a valuation allowance, the Company considered the following sources of taxable income:

Future reversals of existing taxable temporary differences

Future taxable income exclusive of reversing temporary differences and carry forwards

Taxable income in prior carryback years

Tax planning strategies that would, if necessary, be implemented

As a result of the analysis above, the Company concluded that a valuation allowance was necessary as of December 31, 2013 and 2012, after consideration of certain tax planning strategies.

Accrued taxes represent the net estimated amount due to taxing jurisdictions and are reported in other assets or other liabilities, as appropriate, in the Consolidated Balance Sheets. We evaluate and assess the relative risks and appropriate tax treatment of transactions and filing positions after considering statutes, regulations, judicial precedent and other information and maintain tax accruals consistent with the statementevaluation of income effect beingthese relative risks and merits. Changes to the resultestimate of accrued taxes occur periodically due to changes in balance sheet amounts from periodtax rates, interpretations of tax laws, the status of examinations being conducted by taxing authorities and changes to period. Currentstatutory, judicial and regulatory guidance. These changes, when they occur, can affect deferred taxes and accrued taxes, as well as the current period’s income tax expense and can be significant to our operating results.

Tax positions are recognized as a benefit only if it is provided based“more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50 percent likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

Allowance for Unfunded Commitments – In the normal course of business, we offer off-balance sheet credit arrangements to enable our customers to meet their financing objectives. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the financial statements. Our exposure to credit loss, in the event the customer does not satisfy the terms of the agreement, equals the contractual amount of the obligation less the value of any collateral. We apply the same credit policies in making commitments and standby letters of credit that we use for the underwriting of loans

MACON BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued

to customers. Commitments generally have fixed expiration dates, annual renewals or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the actual tax liability incurredtotal commitment amounts do not necessarily represent future cash requirements. The reserve is calculated by applying historical loss rates from our ALL model to the estimated future utilization of our unfunded commitments. The allowance for tax return purposes.

Cash Flow Information - As presentedunfunded commitments is included in Other liabilities in the consolidated statementsConsolidated Balance Sheets.

Junior Subordinated Notes – The Trust is considered to be a variable interest entity since its common equity is not at risk. The Company does not hold a variable interest in the Trust, and therefore, is not considered to be the Trust’s primary beneficiary. As a result, the Company accounts for the junior subordinated notes issued to the Trust and its equity investment in the Trust on an unconsolidated basis. Debt issuance costs of cash flows, cashthe junior subordinated notes are being amortized over the term of the debt and cash equivalents include cashamounted to $123 and $129 as December 31, 2013 and 2012, respectively.

Segments – The Company operates and manages itself within one retail banking segment and has, therefore, not provided segment disclosures.

Recently Issued Accounting Standards

ASU 2013-02 - Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income -In February, 2013, the FASB issued Accounting Standards Update (ASU) 2013-02 that requires entities to disclose:

For items reclassified out of accumulated other comprehensive income (AOCI) and into net income in their entirety, the effect of the reclassification on hand, dueeach affected net income line item; and

For AOCI reclassification items that are not reclassified in their entirety into net income, a cross reference to other required U.S. GAAP disclosures.

This information may be provided either in the notes or parenthetically on the face of the statement that reports net income as long as all the information is disclosed in a single location. However, an entity is prohibited from banks,providing this information parenthetically on the face of the statement that reports net income if it has items that are not reclassified in their entirety into net income. The ASU carries forward the existing requirement that reclassifications out of AOCI be separately presented for each component of other comprehensive income. This information may be presented either on the face of the financial statement that reports comprehensive income or as a separate disclosure in the notes. There is no change in the requirement to present the components of net income and interest-earning depositsother comprehensive income in either a single continuous statement or two separate but consecutive statements. The ASU also does not change what items are reported in other banks.comprehensive income or the requirement to report reclassifications of items from other comprehensive income.

MACON BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued

For nonpublic entities, the new requirements are effective for annual reporting periods beginning after December 15, 2013 and interim and annual periods thereafter. The Company elected to early adopt this ASU as of December 31, 2013.

ASU 2013-11 - Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists -In July 2013, the FASB issuedASU No. 2013-11. When an entity has an unrecognized tax benefit and a net operating loss carryforward (NOL) or similar tax loss or tax credit carryforward in the same jurisdiction as the uncertain tax position, the loss of the tax position may reduce the NOL or tax credit carryforward instead of resulting in a cash payment. The FASB concluded that entities should present the unrecognized tax benefit as a reduction of the deferred tax asset for an NOL or similar tax loss or tax credit carryforward rather than as a liability when the uncertain tax position would reduce the NOL or other carryforward under the tax law. The FASB determined that no new disclosures were necessary. The ASU will require prospective application (including accounting for uncertain tax positions that exist upon date of adoption) with optional retrospective application.

The ASU will be effective for nonpublic companies for annual and interim periods beginning after December 15, 2014. Because the Company does not have any unrecognized tax benefits, no impact from adoption of this ASU is expected.

Subsequent Events - In preparing these consolidated financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through March 21, 2011,07, 2014, the date the financial statements were available to be issued. The Company evaluated its March 31, 2011 consolidated financial statements for subsequent events through May 24, 2011, the date the financials were available to be issued.

Reclassifications - Certain items in prior year financial statements have been reclassified to conform to the March 31, 2011 presentation. These reclassifications had no effect on net income (loss) or equity as previously reported.

Comprehensive Income - Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. However, certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet; such items, along with net income, are components of comprehensive income.

MACON BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements, Continued

The components of other comprehensive income and related tax effects are as follows:

   Three months ended March 31,  Year ended December 31, 
   2011  2010  2010  2009  2008 
   (unaudited)          

Unrealized holding gains (losses) on available-for-sale securities

  $408   $171   $(657 $2,530   $2,712  

Tax effect

   (161  (68  259    (1,000  (1,072

Reclassification adjustment for (gains) losses realized in net income

   (1,633  (842  (1,665  (1,416  (847

Tax effect

   645    333    658    560    335  
                     

Total other comprehensive income (loss)

  $(741 $(406 $(1,405 $674   $1,128  
                     

 

3.Securities

The amortized cost and estimated fair values of securities available for sale as of December 31 are summarized as follows:

 

   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
  Estimated
Fair
Value
 

March 31, 2011 (Unaudited):

       

U.S. Government Agency securities

  $26,503    $48    $(44 $26,507  

Municipal securities

   36,581     361     (1,699  35,243  

Corporate securities

   1,023     —       —      1,023  

Mortgage-backed securities

   90,449     1,285     (234  91,500  

CRA Investment

   530     —       —      530  
                   
  $155,086    $1,694    $(1,977 $154,803  
                   

December 31, 2010:

       

U.S. Government Agency securities

  $53,363    $129    $(84 $53,408  

Municipal securities

   36,874     183     (2,441  34,616  

Corporate securities

   1,024     —       (1  1,023  

Mortgage-backed securities

   124,069     3,352     (198  127,223  

CRA Investment

   526     1     —      527  
                   
  $215,856    $3,665    $(2,724 $216,797  
                   

December 31, 2009:

       

U.S. Government Agency securities

  $9,994    $8    $(83 $9,919  

Municipal securities

   39,844     477     (1,175  39,146  

Corporate securities

   1,028     —       (55  973  

Mortgage-backed securities

   139,035     4,085     (85  143,035  

CRA Investment

   508     —       (4  504  
                   
  $190,409    $4,570    $(1,402 $193,577  
                   
   2013 
   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
  Estimated
Fair
Value
 

Agency

  $22,977     —       (1,078  21,899  

Municipal

   26,963     114     (1,475  25,602  

Mortgage-backed

   110,431     574     (3,590  107,415  

Mutual fund

   576     —       (8  568  
  

 

 

   

 

 

   

 

 

  

 

 

 
  $160,947     688     (6,151  155,484  
  

 

 

   

 

 

   

 

 

  

 

 

 

MACON BANCORP AND SUBSIDIARYSUBSIDIARIES Notes to Consolidated Financial Statements, Continued

   2012 
   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
  Estimated
Fair
Value
 

Agency

  $29,778     11     (48  29,741  

Municipal

   18,515     540     (112  18,943  

Mortgage-backed

   79,920     2,006     (104  81,822  

Mutual fund

   564     21     —      585  
  

 

 

   

 

 

   

 

 

  

 

 

 
  $128,777     2,578     (264  131,091  
  

 

 

   

 

 

   

 

 

  

 

 

 

The amortized cost and estimated fair values of securities held to maturity as of December 31 are summarized as follows:

   2013 
   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
  Estimated
Fair
Value
 

Agency

  $20,988     —       (890  20,098  
  

 

 

   

 

 

   

 

 

  

 

 

 

During the year ended December 31, 2013, the Company transferred the following investment securities from available for sale to held to maturity:

   At Date of
Transfer
   At
December 31, 2013
 

Book value

  $23,000     20,988  

Market value

   20,954     N/A  
  

 

 

   

 

 

 

Unrealized loss

  $2,046     2,012  
  

 

 

   

 

 

 

MACON BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued

 

Information pertaining to securities with gross unrealized losses at MarchDecember 31, 2011, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

 

       (Unaudited)     
   Less Than 12 Months   More Than 12 Months   Total 
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
 

Agency securities

  $4,954    $44    $—      $—      $4,954    $44  

Municipal securities

   11,974     406     6,392     1,293     18,366     1,699  

Mortgage-backed securities

   34,124     234     —       —       34,124     234  
                              
  $51,052    $684    $6,392    $1,293    $57,444    $1,977  
                              

Information pertaining to securities with gross unrealized losses at December 31, 2010, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:

   Less Than 12 Months   More Than 12 Months   Total 
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
 

Agency securities

  $19,477    $84    $—      $—      $19,477    $84  

Corporate securities

   1,023     1     —       —       1,023     1  

Municipal securities

   17,538     912     6,156     1,529     23,694     2,441  

Mortgage-backed securities

   18,122     198     —       —       18,122     198  
                              
  $56,160    $1,195    $6,156    $1,529    $62,316    $2,724  
                              

Information pertaining to securities with gross unrealized losses at December 31, 2009, aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:

   Less Than 12 Months   More Than 12 Months   Total 
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
 

Agency securities

  $7,411    $83    $—      $—      $7,411    $83  

Corporate securities

   —       —       973     55     973     55  

Municipal securities

   13,700     764     2,397     411     16,097     1,175  

Mortgage-backed securities

   13,926     84     52     1     13,978     85  

CRA Investment

   504     4     —       —       504     4  
                              
  $35,541    $935    $3,422    $467    $38,963    $1,402  
                              

At March 31, 2011, the Company had 40 (unaudited) securities with unrealized losses for 12 months or less and 12 (unaudited) securities with unrealized losses for twelve months or more. At December 31, 2010, the Company had 58 securities with unrealized losses for 12 months or less and 12 securities with unrealized losses for twelve months or more. At December 31, 2009, the Company had 44 securities with unrealized losses for 12 months or

   2013 
   Less Than 12 Months   More Than 12 Months   Total 
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
 

Held to Maturity:

            

Agency securities

  $20,098     890     —       —       20,098     890  

Available for Sale:

            

Agency securities

   21,899     1,078     —       —       21,899     1,078  

Municipal securities

   18,653     1,201     2,409     274     21,062     1,475  

Mortgage-backed

   73,836     2,655     9,926     935     83,762     3,590  

Mutual fund

   568     8     —       —       568     8  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $135,054     5,832     12,335     1,209     147,389     7,041  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   2012 
   Less Than 12 Months   More Than 12 Months   Total 
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
 

Available for Sale:

            

Agency securities

  $16,631     48     —         16,631     48  

Municipal securities

   6,394     76     461     36     6,855     112  

Mortgage-backed

   15,817     104     —       —       15,817     104  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $38,842     228     461     36     39,303     264  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

MACON BANCORP AND SUBSIDIARYSUBSIDIARIES Notes to Consolidated Financial Statements, Continued

 

less and 7Information pertaining to the number of securities with unrealized losses for twelve months or more.is detailed in the table below. Management of the Company believes all unrealized losses as of March 31, 2011, December 31, 2010,2013 and December 31, 2009,2012 represent temporary impairment. The unrealized losses have resulted from temporary changes in the interest rate market and not as a result of credit deterioration. Management doesWe do not anticipate sellingintend to sell and it is not likely that we will be required to sell any of the securities for losses, andreferenced in the Company has sufficient cash and available linestable below before recovery of credit to providetheir amortized cost.

   2013 
   Less Than 12 Months   More Than 12 Months   Total 

Agency securities

   17     0     17  

Municipal securities

   43     5     48  

Mortgage-backed

   40     8     48  

Mutual fund

   1     0     1  
  

 

 

   

 

 

   

 

 

 
   101     13     114  
  

 

 

   

 

 

   

 

 

 
   2012 
   Less Than 12 Months   More Than 12 Months   Total 

Agency securities

   7     0     7  

Municipal securities

   14     1     15  

Mortgage-backed

   10     0     10  

Mutual fund

   0     0     0  
  

 

 

   

 

 

   

 

 

 
   31     1     32  
  

 

 

   

 

 

   

 

 

 

For the Company sufficient liquidity.

The Company had securities of approximately $27,000 (unaudited) $77,000 and $67,000 pledged against deposits and FHLB advances at March 31, 2011,years ended December 31, 2010 and 2009, respectively.

Thethe Company had proceeds from sales of securities available for sale of approximately $60,830 (unaudited) and $22,776 (unaudited), $103,260, $61,938, and $75,591 for the three months ended March 31, 2011 and 2010, and the years ended December 31, 2010, 2009, and 2008, respectively. Thetheir corresponding gross realized gains were approximately $1,652 (unaudited), $880 (unaudited), $1,719, $1,439, and $1,149 for the three months ended March 31, 2011 and 2010 and the years ended December 31, 2010, 2009, and 2008, respectively. The gross realized losses were approximately $19 (unaudited), $38 (unaudited), $54, $23, and $302 for the three months ended March 31, 2011 and 2010, and the years ended December 31, 2010, 2009, and 2008, respectively. The tax provision applicable to these net realized gains and losses amounted toas detailed below:

   Sales   Gains   Losses 

December 31, 2013

  $36,404     522     164  

December 31, 2012

  $147,826     3,321     27  

December 31, 2011

  $127,618     1,654     19  

The Company had securities pledged against deposits of approximately $645 (unaudited), $165 (unaudited), $658, $560,$6,778 and $296 for the three months ended March 31, 2011 and 2010, and the years ended$7,000 at December 31, 2010, 2009,2013 and 2008,2012, respectively.

MACON BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued

The amortized cost and estimated fair value of investmentinvestments in debt securities at MarchDecember 31, 2011,2013, by contractual maturity, for debt securities are shown below. The CRA Qualified Investment Fund, with no scheduled maturity, and mortgage-backedMortgage-backed securities have not been scheduled because expected maturities will differ from contractual maturities when borrowers have the right to prepay the obligations.

 

  (Unaudited)   Available for Sale 
  Available for Sale   Amortized Cost   Fair Value 
  

Amortized Cost

   

Fair Value

 

Less than 1 Year

  $340    $345  

Over 1 year through 5 years

   8,503     8,527    $4,285     4,199  

After 5 years through 10 years

   17,588     17,611     18,155     17,141  

Over 10 years

   37,676     36,290     27,500     26,161  
          

 

   

 

 
   64,107     62,773     49,940     47,501  

Mortgage-backed securities

   90,449     91,500     110,431     107,415  

CRA Investment

   530     530  
        
  

 

   

 

 

Total

  $155,086    $154,803    $160,371     154,916  
          

 

   

 

 
  Held to Maturity 
  Amortized Cost   Fair Value 

Over 10 years

   20,988     20,098  
  

 

   

 

 

Total

  $20,988     20,098  
  

 

   

 

 

MACON BANCORP AND SUBSIDIARYSUBSIDIARIES Notes to Consolidated Financial Statements, Continued

The amortized cost and estimated fair value of investment securities at December 31, 2010, by contractual maturity for debt securities are shown below. The CRA Qualified Investment Fund, with no scheduled maturity, and mortgage-backed securities have not been scheduled because expected maturities will differ from contractual maturities when borrowers have the right to prepay the obligations.

   Available for Sale 
   Amortized Cost   Fair Value 

Less than 1 Year

  $630    $640  

Over 1 year through 5 years

   26,643     26,729  

After 5 years through 10 years

   26,050     26,050  

Over 10 years

   37,938     35,629  
          
   91,261     89,048  

Mortgage-backed securities

   124,069     127,222  

CRA Investment

   526     527  
          

Total

  $215,856    $216,797  
          

MACON BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements, Continued

 

4.Loans Receivable

Loans receivable as of December 31 are summarized as follows:

 

   March 31,   December 31, 
   2011   2010   2009 
   (unaudited)         

Real estate mortgage loans:

      

One- to four-family residential

  $241,163    $254,160    $244,830  

Commercial

   202,122     201,219     197,006  

Home equity loans and lines of credit

   73,600     75,322     90,219  

One- to four-family residential construction

   15,207     15,552     28,559  

Other construction and land

   139,615     151,894     190,983  
               

Total real estate loans

   671,707     698,147     751,597  
               

Commercial

   15,122     15,395     16,545  

Consumer

   3,941     4,288     6,242  
               

Total commercial and consumer

   19,063     19,683     22,787  
               

Total loans

   690,770     717,830     774,384  
               

Less:

      

Net deferred loan fees

   2,192     2,326     2,646  

Allowance for loan losses

   20,864     17,195     17,772  
               
   23,056     19,521     20,418  
               

Total loans receivable, net

  $667,714    $698,309    $753,966  
               
   2013  2012 

Real estate mortgage loans:

  

One-to four-family residential

  $225,520    227,726  

Commercial real estate

   155,633    173,529  

Home equity and lines of credit

   56,836    62,090  

Residential construction

   8,952    10,309  

Other construction and land

   64,927    76,788  
  

 

 

  

 

 

 

Total real estate loans

   511,868    550,442  

Commercial and industrial

   8,285    9,771  

Consumer

   3,654    2,676  
  

 

 

  

 

 

 

Total commercial and consumer

   11,939    12,447  
  

 

 

  

 

 

 

Loans receivable, gross

   523,807    562,889  

Less: Net deferred loan fees

   (1,933  (2,165
  

 

 

  

 

 

 

Loans receivable, net

  $521,874    560,724  
  

 

 

  

 

 

 

Allowance for Loan Losses

The total allowance reflects management’s estimate of loan losses inherent in the loan portfolio at the balance sheet date. The Company considershad $93.4 million and $93.8 million pledged as collateral to secure funding with the allowance for loan lossesFederal Home Loan Bank of $20,864 (unaudited) and $17,195 adequate to cover loan losses inherent in the loan portfolioAtlanta at March 31, 2011 and December 31, 2010,2013 and 2012, respectively.

The aggregate amount of extensions of credit to executive officers and directors made in the ordinary course of business as of and for the years ended December 31 is detailed in the table below:

   2013  2012 

Beginning of year

  $10,565    10,426  

New loans

   1,122    3,003  

Repayments

   (1,860  (2,864
  

 

 

  

 

 

 

End of year

  $9,827    10,565  
  

 

 

  

 

 

 

MACON BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued

5.Allowance for Loan Losses

The following table presents,tables present, by portfolio segment, the changes in the allowance for loan losses and the allocation of the allowance for loan losses, as of and for the three months ended March 31, 2011 and the yearyears ended December 31, 2010. There were no unallocated balances.31:

  2013 
  One-to four
Family
Residential
  Commercial
Real Estate
  Home Equity
and Lines of
Credit
  Residential
Construction
  Other
Construction
and Land
  Commercial  Consumer  Total 

Beginning balance

 $4,620    2,973    2,002    429    4,059    379    412    14,874  

Provision

  (77  3,471    316    154    430    (57  121    4,358  

Charge-offs

  1,283    2,209    760    193    1,512    17    675    6,649  

Recoveries

  433    125    22    111    539    31    407    1,668  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

 $3,693    4,360    1,580    501    3,516    336    265    14,251  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Individually evaluated for impairment

 $1,152    2,329    168    —      318    101    —      4,068  

Collectively evaluated for impairment

  2,541    2,031    1,412    501    3,198    235    265    10,183  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 $3,693    4,360    1,580    501    3,516    336    265    14,251  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  2012 
  One-to four
Family
Residential
  Commercial
Real Estate
  Home Equity
and Lines of
Credit
  Residential
Construction
  Other
Construction
and Land
  Commercial  Consumer  Total 
        
        

Beginning balance

 $4,571    4,338    1,562    397    5,456    300    86    16,710  

Provision

  2,081    236    1,950    372    2,112    250    877    7,878  

Charge-offs

  2,511    1,850    1,617    391    4,151    295    821    11,636  

Recoveries

  479    249    107    51    642    124    270    1,922  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

 $4,620    2,973    2,002    429    4,059    379    412    14,874  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Individually evaluated for impairment

 $1,459    1,309    55    —      493    70    —      3,386  

Collectively evaluated for impairment

  3,161    1,664    1,947    429    3,566    309    412    11,488  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 $4,620    2,973    2,002    429    4,059    379    412    14,874  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

MACON BANCORP AND SUBSIDIARYSUBSIDIARIES Notes to Consolidated Financial Statements, Continued

 

March 31, 2011 One- to Four-
Family
Residential
  Commercial
Real Estate
  Home Equity
Loans
And Lines of
Credit
  Residential
One- to Four-
Family
Construction
  Other
Construction
and Land
  Commercial
Business
  Consumer  Total 
(unaudited)                        

Allowance for loan losses:

        

Balance beginning of year

 $4,097   $4,206   $1,428   $540   $6,638   $236   $50   $17,195  

Provision charged to expense

  2,484    1,287    453    201    4,890    103    347    9,765  

Losses charged off

  2,548    145    518    75    3,188    11    379    6,864  

Recoveries

  75    50    205    2    365    52    19    768  
                                

Balance, end of period

 $4,108   $5,398   $1,568   $668   $8,705   $380   $37   $20,864  
                                

Period-end balance allocated to: Loans individually evaluated for impairment

 $883   $2,034   $303   $149   $3,948   $124   $—     $7,441  

Loans collectively evaluated for impairment

  3,225    3,364    1,265    519    4,757    256    37    13,423  

Loans acquired with deteriorated credit quality

  —      —      —      —      —      —      —      —    
                                

Balance, end of period

 $4,108   $5,398   $1,568   $668   $8,705   $380   $37   $20,864  
                                
   2011 
   One-to four
Family
Residential
   Commercial
Real Estate
   Home Equity
and Lines of
Credit
   Residential
Construction
   Other
Construction
and Land
   Commercial   Consumer   Total 

Beginning balance

  $4,097     4,206     1,428     540     6,638     236     50     17,195  

Provision

   6,074     3,850     2,178     812     8,984     1,160     1,058     24,116  

Charge-offs

   6,140     4,202     2,557     1,043     12,417     1,199     1,288     28,846  

Recoveries

   540     484     513     88     2,251     103     266     4,245  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $4,571     4,338     1,562     397     5,456     300     86     16,710  

Individually evaluated for impairment

  $800     1,245     —       —       431     73     —       2,549  

Collectively evaluated for impairment

   3,771     3,093     1,562     397     5,025     227     86     14,161  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $4,571     4,338     1,562     397     5,456     300     86     16,710  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following tables present, by portfolio segment and reserving methodology, the Company’s investment in loans as of December 31:

 

December 31, 2010 One- to Four-
Family
Residential
  Commercial
Real Estate
  Home Equity
Loans
And Lines of
Credit
  Residential
One- to Four-
Family
Construction
  Other
Construction
and Land
  Commercial
Business
  Consumer  Total 

Allowance for loan losses:

        

Balance beginning of year

 $3,820   $3,146   $2,392   $878   $6,595   $823   $118   $17,772  

Provision charged to expense

  3,342    2,515    2,258    1,553    9,164    (70  164    18,926  

Losses charged off

  3,218    1,503    3,473    2,044    9,646    582    268    20,734  

Recoveries

  153    48    251    153    525    65    36    1,231  
                                

Balance, end of year

 $4,097   $4,206   $1,428   $540   $6,638   $236   $50   $17,195  
                                

Period-end balance allocated to:

Loans individually evaluated for impairment

 $1,496   $993   $189   $149   $2,100   $—     $—     $4,927  

Loans collectively evaluated for impairment

  2,601    3,213    1,239    391    4,538    236    50    12,268  

Loans acquired with deteriorated credit quality

  —      —      —      —      —      —      —      —    
                                

Balance, end of year

 $4,097   $4,206   $1,428   $540   $6,638   $236   $50   $17,195  
                                
  2013 
  One-to four
Family
Residential
  Commercial
Real Estate
  Home Equity
and Lines of
Credit
  Residential
1-4
Construction
  Other
Construction
and Land
  Commercial  Consumer  Total 

Individually evaluated for impairment

 $9,865    20,943    1,612    —      7,119    531    —      40,070  

Collectively evaluated for impairment

  215,655    134,690    55,224    8,952    57,808    7,754    3,654    483,737  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 $225,520    155,633    56,836    8,952    64,927    8,285    3,654    523,807  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  2012 
  One-to four
Family
Residential
  Commercial
Real Estate
  Home Equity
and Lines of
Credit
  Residential
1-4
Construction
  Other
Construction
and Land
  Commercial  Consumer  Total 

Individually evaluated for impairment

 $8,920    14,211    1,342    485    9,425    353    —      34,736  

Collectively evaluated for impairment

  218,806    159,318    60,748    9,824    67,363    9,418    2,676    528,153  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
 $227,726    173,529    62,090    10,309    76,788    9,771    2,676    562,889  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

MACON BANCORP AND SUBSIDIARYSUBSIDIARIES Notes to Consolidated Financial Statements, Continued

 

The changes in the allowance for loan losses from prior years presented are summarized as follows:

   (Unaudited)
Three Months
Ended March 31,
  Years Ended December 31, 
   2010  2009  2008 

Beginning balance

  $17,772   $13,167   $9,520  

Provision charged to income

   3,849    21,851    6,210  

Charge-offs, net of recoveries

   (3,364  (17,246  (2,563
             

Ending balance

  $18,257   $17,772   $13,167  
             

The following table presents, by portfolio segment, the Company’s investment in loans.

March 31, 2011  One- to Four-
Family
Residential
   Commercial
Real Estate
   Home Equity
Loans
And Lines of
Credit
   Residential
One- to Four-
Family
Construction
   Other
Construction
and Land
   Commercial
Business
   Consumer   Total 
(unaudited)                                

Loans:

                

Ending balance:

                

Individually evaluated for impairment

  $9,407    $17,688    $584    $2,546    $21,748    $1,150    $—      $53,123  

Ending balance:

                

Collectively evaluated for impairment

   231,756     184,434     73,016     12,661     117,867     13,972     3,941     367,647  

Ending balance:

                

Loans acquired with deteriorated credit quality

   —       —       —       —       —       —       —       —    
                                        

Ending balance

  $241,163    $202,122    $73,600    $15,207    $139,615    $15,122    $3,941    $690,770  
                                        

December 31, 2010  One- to Four-
Family
Residential
   Commercial
Real Estate
   Home Equity
Loans
And Lines of
Credit
   Residential
One- to Four-
Family
Construction
   Other
Construction
and Land
   Commercial
Business
   Consumer   Total 

Loans:

                

Ending balance:

                

Individually evaluated for impairment

  $15,869    $9,744    $629    $2,982    $22,437    $1,161    $—      $52,822  

Ending balance:

                

Collectively evaluated for impairment

   238,291     191,475     74,693     12,570     129,457     14,234     4,288     665,008  

Ending balance:

                

Loans acquired with deteriorated credit quality

   —       —       —       —       —       —       —       —    
                                        

Ending balance

  $254,160    $201,219    $75,322    $15,552    $151,894    $15,395    $4,288    $717,830  
                                        

Portfolio Quality Indicators

The Company’s portfolio grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled or at all.scheduled. The Company’s internal credit risk grading system is based on experiences with similarly graded loans.loans, industry best practices, and regulatory guidance. Credit risk grades are refreshed each quarter as they become available, at which time management analyzes the resulting information, as well as other external statistics and factors, to track loan performance.

MACON BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements, Continued

The Company’s internally assigned grades pursuant to the Board-approved lending policy are as follows:

 

Pass (1-5) – Acceptable loans with any identifiable weaknesses appropriately mitigated.

 

Special Mention (6) – Potential weakness or identifiable weakness present without appropriate mitigating factors; however, loan continues to perform satisfactorily with no material delinquency noted. This may include some deterioration in repayment capacity and/or loan-to-value of securing collateral.

 

Substandard (7) – Significant weakness that remains unmitigated, most likely due to diminished repayment capacity, serious delinquency, and/or marginal performance based upon restructured loan terms. Substandard loans are assessed for impairment and reserves are established where appropriate.

 

Doubtful (8) – Significant weakness that remains unmitigated and collection in full is highly questionable or improbable. No loans in this grade.

 

Loss (9) – Collectability is very poor or out of the questionunlikely resulting in immediate charge-off. No loans in this grade.

Description of segment and class risks

Each of our portfolio segments and the classes within those segments are subject to risks that could have an adverse impact on the credit quality of our loan and lease portfolio. Management has identified the most significant risks as described below which are generally similar among our segments and classes. While the list in not exhaustive, it provides a description of the risks that management has determined are the most significant.

Commercial businessOne- to four-family residential

We centrally underwrite each of our commercialone-to-four family residential loans using credit scoring and leases based primarily upon the customer’s ability to generate the required cash flow to service the debt in accordanceanalytical tools consistent with the contractual termsBoard-approved lending policy and conditions of the loan agreement. We endeavorinternal procedures based upon industry best practices and regulatory directives. Loans to gain a complete understanding of our borrower’s businesses including the experience and background of the principals.be sold to secondary market investors must also adhere to investor guidelines. To the extent that the loan is secured by collateral which is a predominant featurewe also evaluate the value and marketability of the majority of our commercial loans and leases, we gain an understanding of the likely value of the collateral and what level of strength the collateral brings to the loan transaction. To the extent that the principals or other parties provide personal guarantees, we analyze the relative financial strength and liquidity of each guarantor.collateral. Common risks to each class of commercialnon-commercial loans, including one-to-four family residential, include risks that are not specific to individual transactions such as general economic conditions within our markets, as well as risks that are specific to each transaction including demand for productsparticularly unemployment and services, personalpotential declines in real estate values. Personal events such as death, disability or change in marital status and reductions in the value of our collateral.also add risk to non-commercial loans.

MACON BANCORP AND SUBSIDIARYSUBSIDIARIES Notes to Consolidated Financial Statements, Continued

 

Commercial real estate

Commercial mortgage and commercial and industrial loans are primarily dependent on the ability of our customers to achieve business results consistent with those projected at loan origination resulting in cash flow sufficient to service the debt. To the extent that a customer’s business results are significantly unfavorable versus the original projections, the ability for our loan to be serviced on a basis consistent with the contractual terms may be at risk. While these loans are generally secured by real property personal property, orand possibly other business assets such as inventory or accounts receivable, it is possible that the liquidation of the collateral will not fully satisfy the obligation. Other commercial real estate loans consist primarily of loans secured by multifamily housing and agricultural loans. The primary risk associated with multifamily loans is the ability of the income-producing property that collateralizes the loan to produce adequate cash flow to service the debt. High unemployment or generally weak economic conditions may result in our customer having to provide rental rate concessions to achieve adequate occupancy rates. The performance of agricultural loans are highly dependent on favorable weather, reasonable costs for seed and fertilizer, and the ability to successfully market the product at a profitable margin. The demand for these products is also dependent on macroeconomic conditions that are beyond the control of the borrower.

One- to four-family residential

We centrally underwrite each of our non-commercial loans using automated credit scoring and analysis tools. These credit scoring tools take into account factors such as payment history, credit utilization, length of credit history, types of credit currently in use, and recent credit inquiries. To the extent that the loan is secured by collateral we also evaluate the likely value of that collateral. Common risks to each class of non-commercial loans include risks that are not specific to individual transactions such as general economic conditions within our markets, particularly unemployment and potential declines in real estate values. Personal events such as disability or change in marital status also add risk to non-commercial loans.

Home equity loans and lines of credit

Home equity loans are often secured by second liens on residential real estate, thereby making such loans particularly susceptible to declining collateral values. A substantial decline in collateral value could render our second lien position to be effectively unsecured. Additional risks include lien perfection inaccuracies and disputes with first lienholders that may further weaken our collateral position. Further, the open-end structure of these loans creates the risk that customers may draw on the lines in excess of the collateral value if there have been significant declines since origination.

Residential construction and other construction and land

Residential mortgage construction loans are typically secured by undeveloped or partially developed land with funds to be disbursed as home construction is completed contingent upon receipt and satisfactory review of invoices and inspections. Declines in real estate values can result in residential mortgage loan borrowers having debt levels in excess of the collateral’s current market value. Non-commercial construction and land development loans can experience delays in completion and/or cost overruns that exceed the borrower’s financial ability to complete the project. Cost overruns can result in foreclosure of partially completed collateral with unrealized value and diminished marketability. Commercial construction and land development loans are dependent on the supply and demand for commercial real estate in the markets we serve as well as the demand for newly constructed residential homes and building lots. Deterioration in demand could result in significant decreases in the underlying collateral values and make repayment of the outstanding loans more difficult for our customers.

MACON BANCORP AND SUBSIDIARYSUBSIDIARIES Notes to Consolidated Financial Statements, Continued

 

Commercial

We centrally underwrite each of our commercial loans based primarily upon the customer’s ability to generate the required cash flow to service the debt in accordance with the contractual terms and conditions of the loan agreement. We strive to gain a complete understanding of our borrower’s businesses including the experience and background of the principals. To the extent that the loan is secured by collateral, which is a predominant feature of the majority of our commercial loans, or other assets including accounts receivable and inventory, we gain an understanding of the likely value of the collateral and what level of strength it brings to the loan transaction. To the extent that the principals or other parties are obligated under the note or guaranty agreements, we analyze the relative financial strength and liquidity of each guarantor. Common risks to each class of commercial loans include risks that are not specific to individual transactions such as general economic conditions within our markets, as well as risks that are specific to each transaction including volatility or seasonality of cash flows, changing demand for products and services, personal events such as death, disability or change in marital status, and reductions in the value of our collateral.

Consumer

The consumer loan portfolio includes loans secured by personal property such as automobiles, marketable securities, other titled recreational vehicles including boats and motorcycles, as well as unsecured consumer debt. The value of underlying collateral within this class is especially volatile due to potential rapid depreciation in values since date of loan origination in excess of principal repayment.

One- to four-family residential construction and other construction and land
MACON BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued

Residential mortgage and non-commercial construction and land development

The following tables present the recorded investment in loans, are to individuals and are typically secured by 1-4 family residential property, undeveloped land, and partially developed land in anticipationloan grade, as of pending construction of a personal residence. Significant and rapid declines in real estate values can result in residential mortgage loan borrowers having debt levels in excess of the current market value of the collateral. Such a decline in values has led to unprecedented levels of foreclosures and losses during 2008-2010 within the banking industry. Non-commercial construction and land development loans often experience delays in completion and cost overruns that exceed the borrower’s financial ability to complete the project. Such cost overruns can routinely result in foreclosure of partially completed and unmarketable collateral. Commercial construction and land development loans are highly dependent on the supply and demand for commercial real estate in the markets we serve as well as the demand for newly constructed residential homes and lots that our customers are developing. Continuing deterioration in demand could result in significant decreases in the underlying collateral values and make repayment of the outstanding loans more difficult for our customers.December 31.

2013

 

Loan Grade

  One-to Four-
Family
Residential
   Commercial
Real Estate
   Home Equity
and Lines of
Credit
   Residential
Construction
   Other
Construction
and Land
   Commercial   Consumer   Total 

1

  $—       —       —       —       —       176     —       176  

2

   —       —       —       —       —       100     —       100  

3

   73,574     11,960     6,720     607     6,241     598     477     100,177  

4

   64,548     28,164     12,250     2,670     14,489     1,000     231     123,352  

5

   41,272     72,975     11,625     1,555     25,926     4,232     855     158,440  

6

   10,362     18,167     1,578     1,723     4,331     1,495     14     37,670  

7

   10,503     24,346     1,953     —       9,626     590     1     47,019  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $200,259     155,612     34,126     6,555     60,613     8,191     1,578     466,934  

Ungraded Loan Exposure:

                

Performing

  $25,261     21     22,710     2,397     4,314     94     2,076     56,873  

Nonperforming

   —       —       —       —       —       —       —       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

  $25,261     21     22,710     2,397     4,314     94     2,076     56,873  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $225,520     155,633     56,836     8,952     64,927     8,285     3,654     523,807  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

MACON BANCORP AND SUBSIDIARYSUBSIDIARIES Notes to Consolidated Financial Statements, Continued

 

Credit Risk Profile by Rating

Category

March 31, 2011 (unaudited)

                      

Loan Grade

 One- to Four-
Family
Residential
  Commercial
Real Estate
  Home Equity
Loans
And Lines of
Credit
  One-to Four-
Family
Residential
Construction
  Other
Construction
And Land
  Commercial
business
  Consumer  Total 

1

 $—     $—     $—     $—     $—     $485   $—     $485  

2

  —      —      —      —      —      140    —      140  

3

  2,390    12,416    —      186    7,710    1,507    9    24,218  

4

  23,790    47,289    624    1,255    10,315    1,940    6    85,219  

5

  19,719    65,022    2,459    1,705    31,620    6,564    117    127,206  

6

  10,945    42,284    1,755    1,642    13,184    1,900    14    71,724  

7

  28,749    33,212    3,899    3,884    41,875    2,082    60    113,761  
                                

Subtotal

 $85,593   $200,223   $8,737   $8,672   $104,704   $14,618   $206   $422,753  

Ungraded Loan Exposure

March 31, 2011 (unaudited)

                      

Status

 One-to Four-
Family
Residential
  Commercial
Real Estate
  Home Equity
Loans
And Lines of
Credit
  One-to Four-
Family
Residential
Construction
  Other
Construction
And Land
  Commercial
business
  Consumer  Total 

Performing

 $155,527   $1,899   $64,852   $6,535   $34,628   $504   $3,735   $267,680  

Nonperforming

  43    —      11    —      283    —      —      337  
                                

Subtotal

 $155,570   $1,899   $64,863   $6,535   $34,911   $504   $3,735   $268,017  
                                

Total

 $241,163   $202,122   $73,600   $15,207   $139,615   $15,122   $3,941   $690,770  
                                

Credit Risk Profile by Rating

Category

December 31, 2010

                      

Loan Grade

 One-to  Four-
Family
Residential
  Commercial
Real Estate
  Home Equity
Loans

And Lines of
Credit
  One-to Four-
Family
Residential
Construction
  Other
Construction
And Land
  Commercial
business
  Consumer  Total 

1

 $—     $—     $—     $—     $—     $610   $—     $610  

2

  —      —      —      —      —      120    —      120  

3

  2,423    20,375    —      187    7,847    1,608    11    32,451  

4

  24,535    51,690    1,946    1,265    10,052    2,068    25    91,581  

5

  20,547    66,774    1,397    1,758    35,101    6,019    122    131,718  

6

  11,961    31,959    2,206    704    14,869    2,639    48    64,386  

7

  28,726    28,673    2,342    5,079    46,210    2,120    28    113,178  
                                

Subtotal

 $88,192   $199,471   $7,891   $8,993   $114,079   $15,184   $234   $434,044  

Ungraded Loan Exposure

December 31, 2010

               

Status

 One-to Four-
Family
Residential
 Commercial
Real Estate
 Home Equity
Loans
And Lines of
Credit
 One-to Four-
Family
Residential
Construction
 Other
Construction
And Land
 Commercial
business
 Consumer Total 

2012

2012

 

Loan Grade

  One-to Four-
Family
Residential
   Commercial
Real Estate
   Home Equity
and Lines of
Credit
   Residential
Construction
   Other
Construction
and Land
   Commercial   Consumer   Total 

1

  $—       —       —       —       —       299     —       299  

2

   —       —       —       —       —       —       —       —    

3

   73,612     13,600     6,925     3,167     7,252     821     5     105,382  

4

   56,710     31,888     8,395     2,619     13,430     1,305     16     114,363  

5

   34,036     71,077     9,670     377     23,762     3,821     105     142,848  

6

   12,584     34,367     2,699     1,764     7,968     2,298     18     61,698  

7

   17,333     22,597     3,411     1,344     13,636     527     16     58,864  
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal

  $194,275     173,529     31,100     9,271     66,048     9,071     160     483,454  

Ungraded Loan Exposure:

                

Performing

 $162,129   $1,734   $66,910   $6,559   $36,015   $211   $4,045   $277,603    $33,451     —       30,990     1,038     10,740     700     2,516     79,435  

Nonperforming

  3,839    14    521    —      1,800    —      9    6,183     —       —       —       —       —       —       —       —    
                          

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal

 $165,968   $1,748   $67,431   $6,559   $37,815   $211   $4,054   $283,786    $33,451     —       30,990     1,038     10,740     700     2,516     79,435  
                        

Total

 $254,160   $201,219   $75,322   $15,552   $151,894   $15,395   $4,288   $717,830    $227,726     173,529     62,090     10,309     76,788     9,771     2,676     562,889  
                          

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

MACON BANCORP AND SUBSIDIARYSUBSIDIARIES Notes to Consolidated Financial Statements, Continued

 

AgeDelinquency Analysis of Past-Due Financing ReceivablesLoans by Class

Following is a table which includesThe following tables include an aging analysis of the recorded investment of past-due financing receivables by class as of March 31, 2011 and December 31, 2010.31. The number ofCompany does not accrue interest on loans greater than 90 days past due is determined by the amount of time from when payment was due based on contractual terms. Also included are loans that are 90 days or more past due as to interest and principal and still accruing, because they are (1) well-secured and in the process of collection, or (2) real estate loans or loans exempt under regulatory rules from being classified as nonaccrual (in thousands). There were no loans that met these categories as of March 31, 2011 or December 31, 2010.due.

 

March 31, 2011 (unaudited)

  30-89 Days
Past Due
   Greater
Than 90
Days
   Total Past
Due
   Current   Total Loans
Receivable
   Total Loans
>90 Days
and
Accruing
 

One-to four-family residential

  $3,786    $12,838    $16,624    $224,539    $241,163    $—    

Commercial real estate

   5,241     9,500     14,741     187,381     202,122     —    

Home equity loans and lines of credit

   1,452     1,079     2,531     71,069     73,600     —    

Residential 1-4 construction

   —       3,161     3,161     12,046     15,207     —    

Other construction and land

   6,768     22,414     29,182     110,433     139,615     —    

Commercial loans

   2,386     883     3,269     11,853     15,122     —    

Other loans

   22     11     33     3,908     3,941     —    
                              

Total

  $19,655    $49,886    $69,541    $621,229    $690,770    $—    
                              

December 31, 2010

  30-89 Days
Past Due
   Greater
Than 90
Days
   Total Past
Due
   Current   Total Loans
Receivable
   Total Loans
>90 Days
and
Accruing
 

One-to four-family residential

  $5,948    $17,525    $23,473    $230,687    $254,160    $—    

Commercial real estate

   7,179     4,906     12,085     189,134     201,219     —    

Home equity loans and lines of credit

   1,674     1,362     3,036     72,286     75,322     —    

Residential 1-4 construction

   475     1,777     2,252     13,300     15,552     —    

Other construction and land

   5,600     20,661     26,261     125,633     151,894     —    

Commercial loans

   185     957     1,142     14,253     15,395     —    

Other loans

   90     9     99     4,189     4,288     —    
                              

Total

  $21,151    $47,197    $68,348    $649,482    $717,830    $—    
                              
   2013 
   30-89
Days
Past Due
   Greater
Than 90
Days Past
Due
   Total
Past Due
   Current   Total Loans
Receivable
 

One-to four-family residential

  $6,208     2,587     8,795     216,725     225,520  

Commercial real estate

   4,799     722     5,521     150,112     155,633  

Home equity and lines of credit

   342     350     692     56,144     56,836  

Residential construction

   120     —       120     8,832     8,952  

Other construction and land

   684     970     1,654     63,273     64,927  

Commercial

   35     —       35     8,250     8,285  

Consumer

   27     —       27     3,627     3,654  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $12,215     4,629     16,844     506,963     523,807  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   2012 
   30-89
Days
Past Due
   Greater
Than 90
Days Past
Due
   Total
Past Due
   Current   Total Loans
Receivable
 

One-to four-family residential

  $7,413     4,018     11,431     216,295     227,726  

Commercial real estate

   8,961     2,372     11,333     162,196     173,529  

Home equity and lines of credit

   935     785     1,720     60,370     62,090  

Residential construction

   302     194     496     9,813     10,309  

Other construction and land

   1,277     6,234     7,511     69,277     76,788  

Commercial

   55     12     67     9,704     9,771  

Consumer

   15     —       15     2,661     2,676  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $18,958     13,615     32,573     530,316     562,889  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

MACON BANCORP AND SUBSIDIARYSUBSIDIARIES Notes to Consolidated Financial Statements, Continued

 

Impaired Loans

March 31, 2011 (Unaudited)

  Recorded
Balance
   Unpaid
Principal
Balance
   Specific
Allowance
   Average
Investment in
Impaired Loans
   Interest
Income
Recognized
 

Loans without a specific valuation allowance

          

One-to four-family residential

  $3,361     3,361    $—      $3,365    $29  

Commercial real estate

   10,191     11,036     —       11,041     (30

Home equity loans and lines of credit

   —       —       —       —       —    

Residential 1-4 construction

   1,936     2,502     —       2,502     (5

Other construction and land

   5,742     6,170     —       6,174     16  

Commercial loans

   1,025     1,025     —       1,027     7  
                         
  $22,255     24,094    $—      $24,109    $17  
                         

Loans with a specific valuation allowance

          

One-to four-family residential

  $6,046     6,109    $883    $6,429    $35  

Commercial real estate

   7,497     7,497     2,034     7,510     50  

Home equity loans and lines of credit

   584     687     303     686     3  

Residential 1-4 construction

   610     610     149     610     5  

Other construction and land

   16,006     17,709     3,948     17,730     62  

Commercial loans

   125     151     124     154     2  
                         

Total

  $30,868     32,763    $7,441    $33,119    $157  
                         

One-to four-family residential

  $9,407     9,470    $883    $9,794    $64  

Commercial real estate

   17,688     18,533     2,034     18,551     20  

Home equity loans and lines of credit

   584     687     303     686     3  

Residential 1-4 construction

   2,546     3,112     149     3,112     —    

Other construction and land

   21,748     23,879     3,948     23,904     78  

Commercial loans

   1,150     1,176     124     1,181     9  
                         
  $53,123    $56,857    $7,441    $57,228    $174  
                         

December 31, 2010

  Recorded
Balance
   Unpaid
Principal
Balance
   Specific
Allowance
   Average
Investment in
Impaired Loans
   Interest
Income
Recognized
 

Loans without a specific valuation allowance

          

One-to-four family residential

  $7,072    $7,468    $—      $7,498    $214  

Commercial real estate

   5,011     5,125     —       5,181     219  

Home equity loans and lines of credit

   242     345     —       345     12  

Residential 1-4 construction

   2,372     2,938     —       2,974     53  

Other construction and land

   9,093     10,824     —       11,161     420  

Commercial loans

   1,161     1,188     —       1,346     66  
                         
  $24,951    $27,888    $—      $27,888    $984  
                         

Loans with a specific valuation allowance

          

One-to four-family residential

  $8,797    $8,890    $1,497    $8,802    $255  

Commercial real estate

   4,733     4,733     993     4,741     232  

Home equity loans and lines of credit

   387     387     189     386     17  

Residential 1-4 construction

   610     610     149     610     21  

Other construction and land

   13,344     14,816     2,099     14,877     277  
                         

Total

  $27,871    $29,436    $4,927    $29,416    $802  
                         

One-to four-family residential

  $15,869    $16,358    $1,497    $16,300    $469  

Commercial real estate

   9,744     9,858     993     9,922     451  

Home equity loans and lines of credit

   629     732     189     731     29  

Residential 1-4 construction

   2,982     3,548     149     3,584     74  

Other construction and land

   22,437     25,640     2,099     26,038     697  

Commercial loans

   1,161     1,188     —       1,346     66  
                         
  $52,822    $57,324    $4,927    $57,921    $1,786  
                         

MACON BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements, Continued

The Companycompany had investments in non-homogeneous loans that were considered impaired at March 31, 2011 and December 31, 2010 and 2009. The total recorded investmentas detailed in impaired loans was $53,123 (unaudited), $52,822 and $47,531 at March 31, 2011, December 31, 2010 and 2009, respectively. The total allowance associated with those impaired loans was $7,441 (unaudited), $4,927 and $7,188 at March 31, 2011, December 31, 2010 and 2009, respectively. The amount of impaired loans with an associated allowance was $30,868 (unaudited), $27,871 and $28,580 at March 31, 2011, December 31, 2010 and 2009, respectively. The amount of impaired loans with no associated allowance was $22,255 (unaudited), $24,951 and $18,951 at March 31, 2011, December 31, 2010 and 2009, respectively. The average recorded investment in these past due loans considered impaired during the three months ended March 31, 2011 and the years ended 2010 and 2009 was approximately $57,228 (unaudited), $57,921 and $49,751, respectively.tables below. Lost interest income on impaired loans for the three months ended March 31, 2011 and the years ended December 31, 2010, 2009,2013, 2012 and 20082011 was approximately $932 (unaudited), $1,986, $1,573,$215, $747, and $86,$1,941, respectively. Commercial real estate

   December 31, 2013 
   Recorded
Balance
   Unpaid
Principal
Balance
   Specific
Allowance
   Average
Investment
in Impaired

Loans
   Interest
Income
Recognized
 

Loans without a valuation allowance

          

One-to four-family residential

  $4,158     4,539     —       4,586     160  

Commercial real estate

   8,567     9,518     —       9,610     527  

Home equity and lines of credit

   1,102     1,262     —       1,255     46  

Residential construction

   —       —       —       —       —    

Other construction and land

   5,455     6,464     —       6,490     528  

Commercial

   —       —       —       —       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $19,282     21,783     —       21,941     1,261  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans with a valuation allowance

          

One-to four-family residential

  $5,707     5,707     1,152     5,664     221  

Commercial real estate

   12,376     12,376     2,329     3,660     161  

Home equity and lines of credit

   510     510     168     511     19  

Residential construction

   —       —       —       —       —    

Other construction and land

   1,664     1,664     318     937     40  

Commercial

   531     531     101     347     21  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $20,788     20,788     4,068     11,119     462  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

          

One-to four-family residential

  $9,865     10,246     1,152     10,250     381  

Commercial real estate

   20,943     21,894     2,329     13,270     688  

Home equity and lines of credit

   1,612     1,772     168     1,766     65  

Residential construction

   —       —       —       —       —    

Other construction and land

   7,119     8,128     318     7,427     568  

Commercial

   531     531     101     347     21  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $40,070     42,571     4,068     33,060     1,723  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

MACON BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued

   December 31, 2012 
   Recorded
Balance
   Unpaid
Principal
Balance
   Specific
Allowance
   Average
Investment in
Impaired
Loans
   Interest
Income
Recognized
 

Loans without a valuation allowance

          

One-to four-family residential

  $1,607     1,845     —       1,856     69  

Commercial real estate

   6,001     6,591     —       6,653     318  

Home equity loans and lines of credit

   1,094     1,255     —       1,267     46  

Residential 1-4 construction

   485     730     —       740     25  

Other construction and land

   6,904     7,578     —       7,607     110  

Commercial loans

   —       —       —       —       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $16,091     17,999     —       18,123     568  

Loans with a valuation allowance

          

One-to four-family residential

  $7,313     7,455     1,459     7,516     276  

Commercial real estate

   8,210     8,643     1,309     9,552     796  

Home equity loans and lines of credit

   248     248     55     248     12  

Residential 1-4 construction

   —       —       —       —       —    

Other construction and land

   2,521     2,521     493     2,550     111  

Commercial loans

   353     353     70     359     22  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $18,645     19,220     3,386     20,225     1,217  

Total

          

One-to four-family residential

  $8,920     9,300     1,459     9,372     345  

Commercial real estate

   14,211     15,234     1,309     16,205     1,114  

Home equity loans and lines of credit

   1,342     1,503     55     1,515     58  

Residential 1-4 construction

   485     730     —       740     25  

Other construction and land

   9,425     10,099     493     10,157     221  

Commercial loans

   353     353     70     359     22  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $34,736     37,219     3,386     38,348     1,785  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Nonperforming Loans and other real estateAssets

The following table summarizes the balances of nonperforming loans and assets as of December 31. Certain loans classified as troubled debt restructurings and impaired loans may be on non-accrual status even though they are included in the non-homogenous group.not contractually delinquent.

MACON BANCORP AND SUBSIDIARYSUBSIDIARIES Notes to Consolidated Financial Statements, Continued

 

   2013   2012 

One-to four-family residential

  $2,794     5,367  

Commercial real estate

   10,212     4,664  

Home equity loans and lines of credit

   350     852  

Residential 1-4 construction

   —       655  

Other construction and land

   2,068     6,176  

Commercial

   190     12  

Consumer

   13     1  
  

 

 

   

 

 

 

Non-performing loans

   15,627     17,727  

Real estate owned

   10,506     19,755  
  

 

 

   

 

 

 

Non-performing assets

  $26,133     37,482  
  

 

 

   

 

 

 

Nonaccrual LoansTroubled Debt Restructurings (TDR)

The total recorded investment in non-accrualfollowing tables summarize TDR loans as of March 31, 2011, December 31, 2010 and 2009 was approximately $59,176 (unaudited), $60,482 and $21,438, respectively. There were no non-accrual loans as of March 31, 2011 (unaudited), December 31, 2010 and 2009 still accruing interest. Interest income on non accrual loans is applied directly to principal reduction until the loan is returned to accrual status.

The following table presents the financing receivables on nonaccrual status as of March 31, 2011, December 31, 2010 and 2009, respectively:dates indicated:

 

   March 31,   December 31, 
   2011   2010   2009 
   (unaudited)         

One-to four-family residential

  $13,028    $21,118    $8,450  

Commercial real estate

   15,371     9,338     4,445  

Home equity loans and lines of credit

   1,869     1,362     1,960  

Residential 1-4 construction

   3,161     1,777     1,294  

Other construction and land

   24,847     25,822     4,922  

Commercial loans

   889     1,056     345  

Other loans

   11     9     22  
               

Total

  $59,176    $60,482    $21,438  
               

At March 31, 2011, The Company had $13,989 (unaudited) in loans that were accruing interest under the terms of troubled debt restructurings. This amount consists of $5,251 (unaudited) in residential mortgage loans, $627 (unaudited) in revolving credit loans, $7,660 (unaudited) in commercial real estate loans, and $451 (unaudited) in commercial loans.

At December 31, 2010, The Company had $15,095 in loans that were accruing interest under the terms of troubled debt restructurings. This amount consists of $6,780 in residential mortgage loans, $560 in revolving credit loans, $7,297 in commercial real estate loans, and $458 in commercial loans. At December 31, 2009, the company had $22,263 in loans that were accruing interest under the terms of troubled debt restructurings. This amount consists of $11,281 in residential mortgage loans, $491 in revolving credit loans, $10,218 in commercial real estate loans, and $273 in commercial loans. Loan restructurings generally occur when a borrower is experiencing, or is expected to experience, financial difficulties in the near-term. Consequently, a modification that would otherwise not be considered is granted to the borrower. These loans may continue to accrue interest as long as the borrower complies with the revised terms and conditions and has demonstrated repayment performance with the modified terms.

   December 31, 2013 
   Performing   Nonperforming   Total 
   TDR’s   TDR’s   TDR’s 

1-4 family residential

  $5,786     643     6,429  

Commercial real estate

   10,690     694     11,384  

Home equity and lines of credit

   510     —       510  

Residential construction

   —       —       —    

Other construction and land

   5,688     638     6,326  

Commercial real estate

   341     —       341  
  

 

 

   

 

 

   

 

 

 
  $23,015     1,975     24,990  
  

 

 

   

 

 

   

 

 

 

MACON BANCORP AND SUBSIDIARYSUBSIDIARIES Notes to Consolidated Financial Statements, Continued

   December 31, 2012 
   Performing   Nonperforming   Total 
   TDR’s   TDR’s   TDR’s 

1-4 family residential

  $6,321     —       6,321  

Commercial real estate

   10,116     1,720     11,836  

Home equity and lines of credit

   248     —       248  

Residential construction

   —       485     485  

Other construction and land

   4,370     3,245     7,615  

Commercial real estate

   353     —       353  
  

 

 

   

 

 

   

 

 

 
  $21,408     5,450     26,858  
  

 

 

   

 

 

   

 

 

 
   December 31, 2011 
   Performing   Nonperforming   Total 
   TDR’s   TDR’s   TDR’s 

1-4 family residential

  $4,455     3,041     7,496  

Commercial real estate

   7,775     4,810     12,585  

Home equity and lines of credit

   —       —       —    

Residential construction

   621     327     948  

Other construction and land

   4,409     3,663     8,072  

Commercial real estate

   364     14     378  
  

 

 

   

 

 

   

 

 

 
  $17,624     11,855     29,479  
  

 

 

   

 

 

   

 

 

 

MACON BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued

 

The aggregate amount of extensions of credit to executive officers and directors was approximately $12,796 (unaudited), $12,638 and $12,681 at March 31, 2011,Loan modifications that were considered TDR’s for the years ended December 31 2010 and 2009, respectively. There were new loans for 2010 of $4,430 ($1,828 attributable to new directors) and principal payments of $4,473 ($2,423 attributable to retiring directors). There were new loans originatedare summarized in 2011 of $293 (unaudited) and principal payments of $135 (unaudited).the tables below:

   2013 
   Number of
Loans
   Pre-modification
Outstanding
Recorded
Investment
   Post-modification
Outstanding
Recorded
Investment
 

Below market interest rate:

      

One-to four-family residential

   3    $486     397  

HELOC and LOC

   2     263     144  

Commercial real estate

   2     1,802     1,609  
  

 

 

   

 

 

   

 

 

 
   7    $2,551     2,150  
  

 

 

   

 

 

   

 

 

 

Extended payment terms:

      

One-to four-family residential

   1    $199     157  

Commercial real estate

   1     478     215  
  

 

 

   

 

 

   

 

 

 
   2    $677     372  
  

 

 

   

 

 

   

 

 

 
   2012 
   Number of
Loans
   Pre-modification
Outstanding
Recorded
Investment
   Post-modification
Outstanding
Recorded
Investment
 

Below market interest rate:

      

One-to four-family residential

   6    $2,797     2,104  

HELOC and LOC

   2     249     193  

Other Construction and Land

   3     1,156     738  

Commercial real estate

   2     3,199     3,051  
  

 

 

   

 

 

   

 

 

 
   13    $7,401     6,086  
  

 

 

   

 

 

   

 

 

 

Extended payment terms:

      

One-to four-family residential

   1    $184     184  

Residential construction

   1     745     500  
  

 

 

   

 

 

   

 

 

 
   2    $929     684  
  

 

 

   

 

 

   

 

 

 

MACON BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued

   2011 
   Number of
Loans
   Pre-modification
Outstanding
Recorded
Investment
   Post-modification
Outstanding
Recorded
Investment
 

Below market interest rate:

      

One-to four-family residential

   3    $1,199     1,075  

One-to four-family construction

   1     852     621  

Other construction and land

   7     1,716     1,371  

Commercial real estate

   5     3,608     3,258  
  

 

 

   

 

 

   

 

 

 
   16    $7,375     6,325  
  

 

 

   

 

 

   

 

 

 

Extended payment terms:

      

Other Construction and Land

   3     3,902     3,902  
  

 

 

   

 

 

   

 

 

 
   3    $3,902     3,902  
  

 

 

   

 

 

   

 

 

 

The following tables summarize TDR’s that have defaulted within 12 months after being modified during the years ended December 31.

   2013 
   Number of
Loans
   Pre-modification
Outstanding
Recorded
Investment
   Post-modification
Outstanding
Recorded
Investment
 

Below market interest rate:

      

Other construction and land

   1     479     364  
  

 

 

   

 

 

   

 

 

 
   1    $479     364  
  

 

 

   

 

 

   

 

 

 
   2012 
   Number of
Loans
   Pre-modification
Outstanding
Recorded
Investment
   Post-modification
Outstanding
Recorded
Investment
 

Below market interest rate:

      

Residential construction

   1     852     621  
  

 

 

   

 

 

   

 

 

 
   1    $852     621  
  

 

 

   

 

 

   

 

 

 

MACON BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued

   2011 
   Number of
Loans
   Pre-modification
Outstanding
Recorded
Investment
   Post-modification
Outstanding
Recorded
Investment
 

Below market interest rate:

      

Residential construction

   1     234     157  
  

 

 

   

 

 

   

 

 

 
   1    $234     157  
  

 

 

   

 

 

   

 

 

 

Extended payment terms:

      

Other construction and land

   1    $750     656  
  

 

 

   

 

 

   

 

 

 
   1    $750     656  
  

 

 

   

 

 

   

 

 

 

 

5.6.Concentrations of Credit Risk

A substantial portion of the loan portfolio is represented by loans in western North Carolina, northern Georgia, and upstate South Carolina. The capacity and willingness of the Company’s debtors to honor their contractual obligations is dependent upon general economic conditions and the health of the real estate market within its general lending area. The majority of the Bank’sCompany’s loans, commitments and lines of credit have been granted to customers in the Bank’sits primary market area. area and substantially all of these instruments are collateralized by real estate or other assets.

The concentrationsCompany, as a matter of credit by loan classification are set forth in footnote 4. The Bankpolicy, does not extend credit to any individualsingle borrower or group of related borrowers in excess of its legal lending limit of $13,689 (unaudited), $14,453 and $16,653which was $10,355 at March 31, 2011, December 31, 20102013 and 2009, respectively. As of March$10,505 at December 31, 2011, the Bank has one borrower with an aggregate outstanding balance greater than the legal lending limit.2012.

MACON BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued

The largest categoryCompany’s loans were concentrated in the following categories as of loans consisted of one-to-four-family residential loans. These loans approximated $241,163 (unaudited), $254,160 and $244,830 at March 31, 2011, December 31, 20102013 and 2009,2012:

   December 31, 
   2013   2012 

One-to four-family residential

   43.1     40.5

Commercial real estate

   29.7     30.8  

Home equity and lines of credit

   10.9     11.0  

Residential construction

   1.7     1.8  

Other construction and land

   12.4     13.6  

Commercial

   1.6     1.7  

Consumer

   0.7     0.5  
  

 

 

   

 

 

 

Total loans

   100     100
  

 

 

   

 

 

 

7.Fixed Assets

Fixed assets as of December 31 are summarized as follows:

   2013  2012 

Land and improvements

  $7,032    7,037  

Buildings

   12,756    12,696  

Furniture, fixtures and equipment

   7,571    7,149  

Construction in progress

   102    13  
  

 

 

  

 

 

 

Total fixed assets

   27,461    26,895  

Less accumulated depreciation

   (14,455  (13,681
  

 

 

  

 

 

 

Fixed assets, net

  $13,006    13,214  
  

 

 

  

 

 

 

Depreciation and leasehold amortization expense for the years ended December 31, 2013, 2012, and 2011 was $848, $805, and $919, respectively.

MACON BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued

 

6.8.Real Estate Owned

The following table summarizes real estate owned and changes in the valuation allowance for real estate owned as of and for the years ended December 31:

   2013  2012  2011 

Real estate owned, gross

  $16,066    23,390    21,353  

Less: Valuation allowance

   5,560    3,635    4,523  
  

 

 

  

 

 

  

 

 

 

Real estate owned, net

  $10,506    19,755    16,830  
  

 

 

  

 

 

  

 

 

 

Valuation allowance, beginning

  $3,635    4,523    6,101  

Provision charged to expense

   4,093    2,089    6,042  

Reduction due to disposal

   (2,168  (2,977  (7,620
  

 

 

  

 

 

  

 

 

 

Valuation allowance, ending

  $5,560    3,635    4,523  
  

 

 

  

 

 

  

 

 

 

9.Interest Receivable

Interest receivable as of December 31 consists of the following:

   2013   2012 

Loans receivable

  $1,876     2,096  

Investments

   797     586  
  

 

 

   

 

 

 

Total interest receivable

  $2,673     2,682  
  

 

 

   

 

 

 

10.Bank Owned Life Insurance (BOLI)

The following table summarizes the composition of BOLI as of December 31:

   2013   2012 

Separate account

  $11,983     11,743  

General account

   7,188     6,969  

Hybrid

   790     767  
  

 

 

   

 

 

 

Total

  $19,961     19,479  
  

 

 

   

 

 

 

MACON BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued

The assets of the separate account BOLI are invested in the PIMCO Mortgage-backed Securities Account which is composed primarily of Treasury and Agency mortgage-backed securities with a rating of Aaa and repurchase agreements with a rating of P-1.

11.Real Estate Held For Investment

At December 31, 2013, the Company’s $2,489 investment in real estate held for investment was comprised primarily of an investment in the land and buildings of a commercial real estate property, which is being leased over a term of 51 months to an investor. The property produced a net loss of $17 after depreciation expense and payment of property taxes.

12.Loan Servicing

Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage and other loans serviced for others were approximately $301,636 (unaudited), $304,497, $316,433, and $297,030, at March 31, 2011,as of December 31 2010, 2009, and 2008, respectively. is detailed below.

2013

  2012   2011 
$255,475   255,462     287,334  

 

  

 

 

   

 

 

 

The following summarizes the activity in the balance of capitalizedmortgage servicing rights netfor the years ended December 31:

   2013  2012  2011 

Mortgage servicing rights, beginning of year

  $1,908    2,319    3,108  

Capitalization from loans sold

   736    461    163  

Fair value adjustment

   (761  (872  (952
  

 

 

  

 

 

  

 

 

 

Mortgage servicing rights, end of year

  $1,883    1,908    2,319  
  

 

 

  

 

 

  

 

 

 

The Company held custodial escrow deposits of valuation allowances, included in other assets$604 and $473 for loan servicing accounts at March 31, 2011, December 31, 2010, 2009,2013 and 2008, was approximately $2,370 (unaudited), $2,533, $3,024, and $3,042,2012, respectively.

MACON BANCORP AND SUBSIDIARYSUBSIDIARIES Notes to Consolidated Financial Statements, Continued

The following summarizes mortgage-servicing rights capitalized and amortized, along with the aggregate activity in related valuation allowances:

   March 31  Years Ended
December  31,
 
   2011  2010  2009 
   (unaudited)       

Mortgage servicing rights, beginning of period

  $3,108   $3,584   $3,154  

Mortgage servicing rights capitalized

   73    417    1,203  

Mortgage servicing rights amortized

   (236  (893  (773
             

Mortgage servicing rights, end of period

  $2,945   $3,108   $3,584  
             

Valuation allowances:

    

Balances at beginning of period

   575   $560   $112  

Reductions

   —      15    448  
             

Balances at end of period

  $575   $575   $560  
             

The anticipated amortization of the gross loan servicing rights as of December 31, 20101, is as follows:

2011

  $939  

2012

   841  

2013

   695  

2014

   414  

2015

   170  

Thereafter

   49  
     
  $3,108  
     

The Bank held custodial escrow deposits of $817 (unaudited), $538 and $654 in escrow deposits for loan servicing accounts at March 31, 2011, December 31, 2010 and 2009, respectively.

1

There were no material changes to the anticipated amortization of gross loan servicing rights since December 31, 2010.

MACON BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements, Continued

 

7.13.Office Properties and EquipmentDeposits

Office propertiesThe following table summarizes deposit balances and equipmentinterest expense by type of deposit as of and for the years ended December 31:

   2013   2012   2011 
   Balance   Interest
Expense
   Balance   Interest
Expense
   Balance   Interest
Expense
 

Noninterest-bearing demand

  $70,127     —       59,578     —       55,112     —    

Interest-bearing demand

   81,645     134     76,134     127     68,433     150  

Money Market

   183,504     1,122     184,224     1,393     185,043     1,956  

Savings

   25,593     36     25,183     49     26,911     145  

Certificates of Deposit

   323,357     4,534     329,979     6,314     415,333     8,953  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $684,226     5,826     675,098     7,883     750,832     11,204  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Contractual maturities of certificate of deposit accounts as of December 31, 2013 are summarized as follows:

 

   March 31,  December 31, 
   2011  2010  2009 
   (unaudited)       

Land and improvements

  $7,037   $6,416   $6,416  

Buildings

   12,688    12,696    12,725  

Furniture, fixtures and equipment

   7,037    7,262    7,203  

Construction in progress

   —      624    621  
             

Total office properties and equipment

   26,762    26,998    26,965  

Less accumulated depreciation

   (12,514  (12,537  (11,626
             

Office properties and equipment, net

  $14,248   $14,461   $15,339  
             

Depreciation and leasehold amortization expense for the three months ended March 31, 2011 and 2010 and the years ended December 31, 2010, 2009, and 2008 was $232 (unaudited), $243 (unaudited), $934, $1,248, and $1,033, respectively.

During 2009 the Company transferred from Real Estate Owned to its Land account an 11 acre tract of land adjoining its corporate headquarters. The transfer price was $260 thousand, and was based on the property’s real estate owned appraised value.

8.Interest Receivable

Interest receivable consists of the following:

   March 31,   December 31, 
   2011   2010   2009 
   (unaudited)         

Loans receivable

  $2,681    $3,049    $3,537  

Investments

   924     1,244     1,250  
               

Total interest receivable

  $3,605    $4,293    $4,787  
               

MACON BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements, Continued

9.Deposits

Contractual maturities of certificate accounts are summarized as follows:

  March 31,   December 31, 
  2011   2010   2009 
  (unaudited)         

1 Year

  $199,688    $222,873    $332,249  �� $134,612  

2 Years

   196,781     201,027     102,048     81,276  

3 Years

   23,665     20,824     61,313     45,039  

4 Years

   6,317     6,827     11,619     24,207  

5 Years

   21,033     17,504     4,089     29,367  

Thereafter

   7,959     7,345     10,178     8,856  
              

 

 

Total certificates of deposit

  $455,443    $476,400    $521,496    $323,357  
              

 

 

The Company had certificate of deposit accounts in amounts of $100 thousand or more of approximately $186,000 (unaudited), $374,000$136 million and $370,000$140 million at March 31, 2011, December 31, 20102013 and 2009,2012, respectively.

At March 31, 2011, December 31, 20102013 and 2009,2012, the BankCompany held approximately $120,212 (unaudited), $152,920$11,528 and $191,760,$23,236, respectively, in brokered deposits with various maturity dates.maturities ranging through June, 2015. Advance fees paid to obtain these deposits are included in otherOther assets and amortized into interest expense over the term of the brokered deposits.

At March 31, 2011,deposits and amounted to $29 and $61 as of December 31, 20102013 and 2012, respectively.

The Company had deposits from related parties of $3,571 and $3,237 at December 31, 2009, the Company had related party deposits from directors2013 and executive officers of $2,050 (unaudited), $1,806 and $2,2972012, respectively.

MACON BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements, Continued

 

10.14.Borrowings

The Company has total credit availability with the FHLB of up to 30% of assets, subject to the availability of qualified collateral. The Company pledges as collateral for these borrowings certain investment securities, its FHLB stock, and its entire loan portfolio of qualifying mortgages (as defined) under a blanket collateral agreement with the FHLB. At March 31, 2011, December 31, 2010 and 2009,2013, the Company had unused borrowing capacity with the FHLB of $53.4 million.

MACON BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued

The following table summarizes the outstanding FHLB advances under this line amounted to $65,900 (unaudited), $128,400 and $178,400, respectively, and carried weighted average interest ratesas of 3.66% (unaudited), 3.85% and 3.92%, respectively. Advances at MarchDecember 31:

2013

   2012 
Balance  Type  Rate  Maturity   Balance   Type  Rate  Maturity 

$ 5,000

  Fixed   0.37  6/30/2015     —      —     —      —    

5,000

  Fixed   0.50  12/30/2015     —      —     —      —    

5,000

  Fixed   0.98  12/30/2016     —      —     —      —    

10,000

  Fixed   1.83  4/10/2019     10,000    Fixed Convertible   2.13  2/2/2015  

15,000

  Variable   2.80  4/10/2020     15,000    Fixed   3.90  1/28/2019  

 

    

 

 

    

 

 

     

 

 

  
$40,000     1.74    25,000       3.19 

 

    

 

 

    

 

 

     

 

 

  

During the year ended December 31, 2011 were comprised2013, the Company restructured its $25.0 million of FHLB fixed rate advances into $10.0 million of fixed rate advancesand $15.0 million of $65,900 (unaudited). The fixedvariable rate advances, at March 31, 2011 had interest rates ranginglowering the average cost from 2.12%3.19% to 5.05% (unaudited) and terms ranging from one to eight years. Advances at December 31, 2010 were composed of fixed rate advances of $128,400. The fixed rate advances at December 31, 2010 had interest rates ranging from 2.12% to 5.05% and terms ranging from one to eight years.2.41%. The scheduled maturities of FHLB advances, with respective weighted average rates, at March 31, 2011 and December 31, 2010, respectively,2013 are as follows:

 

Twelve Month Period Ended March 31,

  Balance   Weighted
Average Rate
 

2012

  $—       —    

2013

   40,900     3.95  

2014

   —       —    

2015

   10,000     2.12  

2016 – 2019

   15,000     3.90  
          

Total FHLB advance

  $65,900     3.66
          

Years Ended December 31,

  Balance   Weighted
Average Rate
 

2011

  $40,000     3.77

2012

   53,400     4.38

2013

   10,000     2.98

2014

   —       —    

2015

   10,000     2.12

2016 – 2019

   15,000     3.90
          

Total FHLB advance

  $128,400     3.85
          
       Average 
   Balance   Rate 

2014

  $—       —    

2015

   10,000     0.44

2016

   5,000     0.98

2017

   —       —    

2018

   —       —    

2019 – 2020

   25,000     2.41
  

 

 

   

 

 

 

Total FHLB advances

  $40,000     1.74
  

 

 

   

 

 

 

The BankCompany also maintains an approximately $41$57 million in federal funds accommodation with the Federal Reserve discount window. The Bank had no Federal Reserve discount window borrowings at March 31, 2011 (unaudited), December 31, 20102013 and 2009.2012. The rate charged on these advances is currently the fed fundFed Funds target rate plus 0.50% (0.75% as of March 31, 2011 (unaudited) and December 31, 2010)2013).

MACON BANCORP AND SUBSIDIARYSUBSIDIARIES Notes to Consolidated Financial Statements, Continued

 

11.15.Junior Subordinated DebentureNotes

The Holding Company issued $14.4 million of junior subordinated debenturesnotes to its wholly owned capital trust,subsidiary, Macon Capital Trust I (the “trust”)(Trust), to fully and unconditionally guarantee the trust preferred securities issued by the trust.Trust. These long-term obligations, which currentlynotes qualify as Tier I capital for the Company, constitute a full and unconditional guarantee by the Company of the trusts’ obligations under the agreement to issue trust preferred securities.

Company. The junior subordinated debenturesnotes accrue and pay interest quarterly at a rate per annum, reset quarterly, equal to 90-day LIBOR plus 2.80% (total of 3.10% at March 31, 2011 and 3.10%(3.05% at December 31, 2010, respectively)2013). The junior subordinated debenturesnotes mature on March 30, 2034.

The TrustCompany has the right to redeem the debt,notes, in whole or in part, on or after March 30, 2010. If the debt is redeemed on or after March 30, 2010, the redemption2009 at a price will beequal to 100% of the principal amount plus accrued and unpaid interest. In addition, the BankCompany may redeem the debtnotes in whole (but not in part) at any time within 90 days followingupon the occurrence of a taxcapital disqualification event, an investment company event, or a capital treatmenttax event at a specialspecified redemption price (asas defined in the indenture). indenture.

The Company also may, at its option, upon one business day notification prior to the interest payment due date; defer the payment of interest on the notes for a period up to twenty consecutive quarters. The balancequarters, provided that interest will also accrue on the junior subordinated debentures at March 31, 2011 (unaudited),deferred payments of interest. As of December 31, 2010 and 2009 was $14.4 million. As of March 31, 2011, December 31, 2010 and 2009,2013, the Company has deferred future payments of interest on the notes for 12 consecutive quarters in the aggregate amount of $226 (unaudited), $113 and $0, respectively.$1,567.

 

12.16.Employee Benefit Plans

The Company maintains an employee savings plan under Section 401(k) of the Internal Revenue Code. This plan covers substantially all full-time employees who have attained the age of twenty-one. Employees may contribute a percentage of their annual gross salary as limited by the federal tax laws. The Company matches employee contributions based on the plan guidelines. The amount charged against income was approximately $60 (unaudited), $61 (unaudited), $244, $265,Company contribution totaled $184, $164, and $292, for the three months ended March 31, 2011 and 2010 and the years ended December 31, 2010, 2009, and 2008, respectively.

MACON BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements, Continued

The Company has established several nonqualified compensation programs providing benefits to directors and certain key management employees. The benefits under the plans are computed and payable under certain terms as specified in each agreement. The estimated present value of future benefits to be paid is being accrued over the period from the effective date of the agreements over the service period. The expense incurred and the amount accrued for the three months ended March 31, 2011 and 2010 and$251 for the years ended December 31, 2010, 2009,2013, 2012, and 2008, was approximately $(22) (unaudited), $275 (unaudited), $684, $823, and $1,774,2011, respectively. The cumulative accrued liabilities for the above plans are presented in the accompanying consolidated balance sheets in “Accrued expenses and other liabilities” totaling approximately $10,742 (unaudited), $11,170 and $11,824 at March 31, 2011, December 31, 2010 and 2009, respectively.

The Company has purchased and is the owner and beneficiary of certain life insurance policies to finance the obligations under certain agreements. Proceeds from the insurance policies are payable to the Company upon the death of the participant. The Company has also invested in bank-owned life insurance as a means to fund various split dollar agreements. The cash surrender value of the policies and the bank-owned life insurance was approximately $18,476 (unaudited), $18,315 and $17,701 at March 31, 2011, December 31, 2010 and 2009, respectively.

The Company has purchased some life insurance policies that provide a post retirement benefit under the split dollar arrangement, and are therefore subject to treatment under ASC 715-60 (formerly EITF 06-4, Post Retirement Split Dollar Benefits).

The Company has a compensated expense policy that allows employees to accrue paid time off for vacation, sick or other unexcused absences up to a specified number of days each year. Employees may sell back a limited amount of unused time at the end of each year or convert the time to an accrued sick time account which is forfeited if unused at termination.termination, but no carry-over or payout of unused time is permitted.

17.Post-Employment Benefits

The Company suspended its Long Term Capital Appreciation Plan duringhas established several nonqualified deferred compensation and post- employment programs providing benefits to certain directors and key management employees. No new participants have been admitted to any of the quarter ended March 31, 2011. The balances of current participants will remain frozen within that plan. The total balance within the plan was approximately $2,028 (unaudited) at March 31, 2011.plans since 2009 and existing benefit levels have been frozen.

MACON BANCORP AND SUBSIDIARYSUBSIDIARIES Notes to Consolidated Financial Statements, Continued

 

A summary of the key terms and accounting for each plan are as follows:

Supplemental Executive Retirement Plan (SERP) – provides a post-retirement income stream to several current and former executives. The estimated present value of the future benefits to be paid during a post-retirement period of 216 months is accrued over the period from the effective date of the agreement to the expected date of retirement using a discount rate of 7%.

CAP Equity Plan – provides a post-retirement benefit payable in cash, the formula for which is based on the increase in the value of the Company’s equity times a presumed number of units. Interest of 8% is accrued on a participant’s unpaid balances, subject to the terms of the Plan.

Director Consultation Plan – provides a post-retirement monthly benefit for continuing to provide consulting services as needed. The gross amount of the future payments are accrued.

Deferred Compensation Plan – allowed certain officers and directors to defer compensation and fees into a Rabbi Trust. Interest is accrued based on a three year average Return on Equity, which was 0% at December 31, 2013.

Life Insurance Plan – provides an endorsement split dollar benefit to several current and former executives, under which the Company has agreed to maintain an insurance policy during the executive’s retirement and to provide the executive with a death benefit. The estimated cost of insurance for the portion of the policy expected to be paid as a split dollar death benefit in each post-retirement year is measured for the period between expected retirement age and the earlier of (a) expected mortality and (b) age 95. The resulting amount is then allocated on a present value basis to the period ending on the participant’s full eligibility date. A discount rate of 6% and life expectancy based on the 2001 Valuation Basic Table has been assumed.

A summary of the liabilities related to each of the plans as of December 31 is as follows:

   2013   2012 

SERP

  $3,673     3,695  

Cap Equity

   5,357     5,658  

Director Consultation

   228     231  

Deferred Compensation

   389     772  

Life Insurance

   552     512  
  

 

 

   

 

 

 
  $10,199     10,868  
  

 

 

   

 

 

 

13.
MACON BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued

The annual expense related to the plans noted above totaled $638, $623 and $558 for the years ended December 31, 2013, 2012 and 2011, respectively.

18.Income Taxes

Income tax expense (benefit) for the years ended December 31 is summarized as follows:

 

   For the Three Months Ended
March 31, 2011 (unaudited)
 
   Federal  State  Total 

Current

  $—     $—     $—    

Deferred

   (3,111  (230  (3,341

Deferred tax – asset valuation

   3,111    230    3,341  
             

Total

  $—     $—     $—    
             
   For the Year Ended
December 31, 2010
 
   Federal  State  Total 

Current

  $(3,435 $(628 $(4,063

Deferred

   (562  (122  (684

Deferred tax – asset valuation

   8,452    —      8,452  
             

Total

  $4,455   $(750 $3,705  
             
   For the Year  Ended
December 31, 2009
 
   Federal  State  Total 

Current

  $(1,686 $(357 $(2,043

Deferred

   (3,341  (707  (4,048
             

Total

  $(5,027 $(1,064 $(6,091
             
   For the Year Ended
December 31, 2008
 
   Federal  State  Total 

Current

  $5,017   $1,026   $6,043  

Deferred

   (2,556  (523  (3,079
             

Total

  $2,461   $503   $2,964  
             

MACON BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements, Continued

   2013   2012  2011 

Current

     

Federal

  $46     (571  —    

State

   —       —      —    

Deferred

   —       (404  (10,259

Change in valuation allowance

   429     (36  11,633  
  

 

 

   

 

 

  

 

 

 

Total income tax expense (benefit)

  $475     (1,011  1,374  
  

 

 

   

 

 

  

 

 

 

The differences between actual income tax expense and the amount computed by applying the federal statutory income tax rate of 35% to income before income taxes arefor the years ended December 31 is reconciled as follows:

 

  March 31, December 31, 
  2011 (unaudited) 2010 2009 2008   2013 2012 2011 
  $ Rate $ Rate $ Rate $ Rate   $ Rate $ Rate $ Rate 

Computed income tax expense (benefit)

  $(3,114  (35.0)%  $(3,693  (35.0)%  $(4,857  (35.0)%  $3,299    35.0   21    35.0 (27  -35.0  (8,663  -35.0

Deferred tax – asset valuation

   3,341    37.6  8,452    80.1  —      —      —      —    

Deferred tax valuation allowance

   429    715.0 (36  46.2  11,633    -47.3

State income tax, net of federal benefit

   (150  (1.7)%   (488  (4.6)%   (692  (5.0)%   327    3.5   76    126.7  —      0.0  (1  0.0

Nontaxable municipal security income

   (126  (1.4)%   (543  (5.1)%   (577  (4.2)%   (440  (4.7)%    (123  -205.0 (232  297.4  (560  2.3

Nontaxable BOLI income

   (61  (0.7)%   (233  (2.2)%   (247  (1.9)%   (216  (2.3)%    (190  -316.7 (188  241.0  (220  0.9

Other, primarily nontaxable income

   110    1.2  210    1.9  282    2.2  (6  .01

Other

   262    436.7 (528  676.9  (815  3.3
                           

 

  

 

  

 

  

 

  

 

  

 

 

Actual income tax expense(benefit)

  $—      —     $3,705    35.1 $(6,091  (43.9)%  $2,964    31.51

Actual income tax expense (benefit)

   475    791.7  (1,011  1296.5  1,374    -5.6
                           

 

  

 

  

 

  

 

  

 

  

 

 

MACON BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued

The components of net deferred taxes as of December 31 are summarized as follows:

 

   March 31,  December 31, 
   2011  2010  2009 
   (unaudited)       

Deferred tax assets:

    

Bad debt reserves

  $8,238   $6,789   $7,017  

Deferred compensation

   4,581    4,735    4,946  

Uncollected interest

   989    872    338  

Valuation reserve for other real estate

   2,518    2,409    2,589  

North Carolina NOL Carryover

   866    1,032    —    

Federal NOL Carryover

   1,770    —      —    

Other

   87    —      —    
             

Gross deferred tax assets

   19,049    15,837    14,890  
             

Less valuation allowance

   (11,793  (8,452  —    
             

Total deferred tax assets

   7,256    7,385    14,890  
             

Deferred tax liabilities:

    

Excess tax depreciation

   546    574    755  

FHLB stock dividends

   10    10    136  

Loan servicing rights

   936    1,000    1,194  

Deferred gain on sale of real estate

   42    42    44  

Prepaid expenses

   —      193    122  

Unrealized gains on securities available for sale

   —      429    1,252  

Other

   56    68    46  
             

Total deferred tax liabilities

   1,697    2,316    3,549  
             

Net deferred tax asset

  $5,559   $5,069   $11,341  
             
   2013  2012 

Deferred tax assets:

   

Allowance for loan losses

  $5,451    5,873  

Deferred compensation and post employment benefits

   3,752    4,101  

Non-accrual interest

   356    415  

Valuation reserve for other real estate

   2,127    1,435  

North Carolina NOL carryover

   1,381    1,991  

Federal NOL carryover

   11,947    12,012  

Unrealized losses on securities

   2,860    —    

Other

   389    287  
  

 

 

  

 

 

 

Gross deferred tax assets

   28,263    26,114  

Less: valuation allowance

   (22,556  (19,430
  

 

 

  

 

 

 

Total deferred tax assets

   5,707    6,684  

Deferred tax liabilities:

   

Fixed assets

   448    442  

Mortgage servicing rights

   720    753  

Deferred loan costs

   205    73  

Prepaid expenses

   124    118  

Unrealized gains on securities

   —      1,048  

Other

   —      40  
  

 

 

  

 

 

 

Total deferred tax liabilities

   1,497    2,474  
  

 

 

  

 

 

 

Net deferred tax asset

  $4,210    4,210  
  

 

 

  

 

 

 

As of December 31, 2013 and 2012, the Company has determined that a valuation allowance is necessary for a portion of its net deferred tax assets. As of each of these dates, the Company has determined that it is not able to reasonably predict future taxable income and has exhausted its taxable income in prior carryback years. As a result, the Company has limited the recognition of its net deferred tax asset to the amount of tax planning strategies that would, if necessary, be implemented.

MACON BANCORP AND SUBSIDIARYSUBSIDIARIES Notes to Consolidated Financial Statements, Continued

 

Effective January 1, 2008,The following table summarizes the Company adopted ASC 740-10 (formerly FASB Interpretation No. 48 “Accountingactivity in the valuation allowance for Uncertainty in Income Taxes” – an interpretation of FASB statement No. 109). ASC 740-10 provides guidance on financial statement recognitiondeferred tax assets, as well as the corresponding accounting, for the years ended December 31:

   

Accounting

  2013  2012  2011 

Beginning of year

    $19,430    18,650    8,452  

Change in unrealized losses (gains) on securities

  Other Comprehensive Income   3,479    816    (1,435

Change in unrealized losses (gains) on securities

  Income tax expense (benefit)   429    —      —    

Change in valuation allowance

  Income tax expense (benefit)   —      (36  11,633  

Change in deferred taxes

  Deferred tax asset, net   (782  —      —    
    

 

 

  

 

 

  

 

 

 

End of year

    $22,556    19,430    18,650  
    

 

 

  

 

 

  

 

 

 

The following table summarizes the amount and measurement of tax positions taken, or expected to be taken, in tax returns. As a resultexpiration dates of the implementation,Company’s unused net operating losses as of December 31, 2013:

       Expiration 
   Amount   Dates 

Federal

  $34,134     2031 - 2032  

North Carolina

   42,501     2024 - 2027  

During the year ended December 31, 2013, the Company recognized an approximately $500 decreasea reduction in the liability for unrecognized tax benefits which was accounted for as an increase to the January 1, 2008, balance of retained earnings.

A valuation allowance of $11,793 (unaudited) and $8,452 was provided at March 31, 2011 and December 31, 2010, respectively, related toits net deferred tax assets. The valuation allowance was established based upon determination that it was more likely than not the deferred tax assets would not be fully realized primarilyof approximately $874 as a result of a reduction in the significant operating losses experiencedexpected North Carolina income tax rate from 6.9% to 5%. This reduction was offset by a corresponding decrease in the Bank in 2011, 2010 and 2009.valuation allowance.

The Company is subject to examination for federal and state purposes for the tax years 20072010 through 2010.2013. As of December 31, 2013 and 2012, the Company does not have any material Unrecognized Tax Benefits.

MACON BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued

 

14.19.Accumulated Other Comprehensive Income (Loss)

The following table summarizes the components of accumulated other comprehensive income (loss) and changes in those components as of and for the years ended December 31:

      HTM  Deferred
Tax
    
   Available  Securities  Valuation    
   for Sale  Transferred  Allowance    
   Securities  from AFS  on AFS  Total 

Balance, December 31, 2010

  $512   $—     $—     $512  
  

 

 

  

 

 

  

 

 

  

 

 

 

Change in deferred tax valuation allowance attributable to unrealized gains (losses) on investment securities available for sale

   —      —      1,435    1,435  

Change in unrealized holding gains (losses) on securities available for sale, net of income taxes

   5,041    —      —      5,041  

Reclassification of net gains realized and included in earnings

   (1,635  —      —      (1,635

Income tax expense (benefit)

   (1,345  —      —      (1,345
  

 

 

  

 

 

  

 

 

  

 

 

 

Balance, December 31, 2011

  $2,573   $—     $1,435   $4,008  
  

 

 

  

 

 

  

 

 

  

 

 

 

Change in deferred tax valuation allowance attributable to unrealized gains (losses) on investment securities available for sale

   —      —      (816  (816

Change in unrealized holding gains (losses) on securities available for sale, net of income taxes

   1,134    —      —      1,134  

Reclassification of net gains realized and included in earnings

   (3,294  —      —      (3,294

Income tax expense (benefit)

   853    —      —      853  
  

 

 

  

 

 

  

 

 

  

 

 

 

Balance, December 31, 2012

  $1,266   $—     $619   $1,885  
  

 

 

  

 

 

  

 

 

  

 

 

 

Change in deferred tax valuation allowance attributable to unrealized gains (losses) on investment securities available for sale

   —      —      (3,479  (3,479

Change in unrealized holding gains (losses) on securities available for sale, net of income taxes

   (9,431  —      —      (9,431

Reclassification of net gains realized and included in earnings

   (358  —      —      (358

Transfer of unrealized loss from AFS to HTM, net of cumulative tax effect

   1,263    (1,263  —      —    

Amortization of unrealized loss on securities transferred to HTM

   —      34    —      34  

Income tax expense (benefit)

   3,886    (13  —      3,873  
  

 

 

  

 

 

  

 

 

  

 

 

 

Balance, December 31, 2013

  $(3,374 $(1,242 $(2,860 $(7,476
  

 

 

  

 

 

  

 

 

  

 

 

 

MACON BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued

The following table shows the line items in the consolidated Statements of Operations affected by amounts reclassified from accumulated other comprehensive income (loss):

   

2013

  

2012

   

2011

   

Increase (decrease) in

affected line item in

Statements of Operations

Gains and losses on sale of AFS securities

  $358    3,294     1,635    

Tax effect

   137    1,301     646    Income tax expense (benefit)
  

 

 

  

 

 

   

 

 

   

Impact, net of tax

   221    1,993     989    Net income

Amortization of net unrealized loss on securities transferred to HTM

   (34  —       —      Interest income on taxable securities

Tax effect

   13    —       —      Income tax expense (benefit)
  

 

 

  

 

 

   

 

 

   

Impact, net of tax

   (21  —       —      Net income

Total reclassifications, net of tax

  $200    1,993     989    Net income
  

 

 

  

 

 

   

 

 

   

20.Regulatory Matters

The Bank is subject to various regulatory capital requirements administered by the Federal Deposit Insurance Company (“FDIC”). Failure to meet minimum capital requirements can initiate certain mandatory, and possible additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. In addition, the Bank is subject to a North Carolina Savings Institution (State) capital requirement of at least 5% of total assets. The Bank must have prior approval from the FDIC before paying dividends, and may not pay interest on its junior subordinated debentures. The Bank’s federaldebentures without approval.

On March 26, 2012, the Bank entered into a Consent Order with the FDIC and the North Carolina regulatory authorities are requiringCommissioner of Banks. The Consent Order seeks to enhance the maintenanceBank’s existing practices and procedures in the areas of credit risk management, interest rate risk management, capital levels, and Board oversight. With respect to capital, the Consent Order requires the Bank to achieve by June 26, 2012 and thereafter maintain a Tier 1 Leverage Capital Ratiocapital to average assets (leverage) ratio of not less thanat least 8% and a Total Risk Based Capital Ratio of not less than 12%. As of March 31, 2011, the Bank’s Tier 1 Leverage ratio and Total Risk Based Capital Ratio was 7.10% (unaudited) and 11.6%, respectively and, as a result, it did not meet the mandated Tier 1 and Total Risk Based Capital well capitalized ratios. As of December 31, 2010, the Bank’s Tier 1 Leverage ratio was 7.70% and, as a result, it did not meet the mandated Tier 1 well capitalized ratio. The Bank continues to meet its well capitalized Total Risk Based Capital Ratio and its well capitalized Tier 1total risk-based capital to total Risk Based Assetsrisk-weighted assets ratio of 6%at least 11%. The Consent Order results in the Bank being deemed

MACON BANCORP AND SUBSIDIARYSUBSIDIARIES Notes to Consolidated Financial Statements, Continued

 

“adequately capitalized” irrespective of the fact that the Bank’s actual capital ratios indicate “well-capitalized” status as defined by the applicable regulations. If the Bank is unable to achieve the required capital ratios within the specified time frames, or otherwise fails to adhere to the Consent Order, further regulatory actions could be taken. Further, the ability to operate as a going concern could be negatively impacted. As of December 31, 2013 and 2012, the Bank did not meet the mandated level for Tier 1 Leverage Capital, but did meet the mandated level for Total Risk Based Capital.

The Company has taken the following actions, among other things, to improve its earnings and capital position:

Reduced its level of assets during 2011 and 2012;

Decreased its levels of FHLB advances and brokered deposits in order to reduce higher cost funding sources;

Hired additional resources to dispose of non-performing assets and real estate owned;

Reduced its concentration in higher risk lending types, including acquisition and development loans; and

Approved a plan of conversion to raise capital (see Note 25).

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined).

MACON BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued

Following are the required and actual capital amounts and ratios for the Bank:

 

   Actual  For Capital
Adequacy Purposes
  To Be Well
Capitalized
Under Prompt
Corrective Action
Provisions
 
   Amount   Ratio  Amount   Ratio  Amount   Ratio 

As of March 31, 2011 (Unaudited):

  

        

Tier 1 Capital (to average assets)

  $70,394     7.1  39,843     >4  49,804     >5

Tier 1 Capital (to risk-weighted assets)

   70,394     10.3  27,396     >4  41,093     >6

Total Capital (to risk-weighted assets)

   79,109     11.6  54,797     >8  68,489     >10

As of December 31, 2010:

          

average assets)

  $79,159     7.7 $41,494     >4 $51,868     >5

Tier 1 Capital (to risk-weighted assets)

  $79,159     10.9 $29,229     >4 $43,843     >6

Total Capital (to risk-weighted assets)

  $88,387     12.2 $58,458     >8 $73,072     >10

As of December 31, 2009:

          

Tier 1 Capital (to average assets)

  $93,254     8.6 $43,623     >4 $54,529     >5

Tier 1 Capital (to risk-weighted assets)

  $93,254     12.1 $30,836     >4 $46,254     >6

Total Capital (to risk-weighted assets)

  $102,991     13.4 $61,671     >8 $77,089     >10
   Actual  For Capital
Adequacy Purposes
  To meet the
Requirements of the
Consent Order
dated

March 26, 2012
 
   Amount   Ratio  Amount   Ratio  Amount   Ratio 

As of December 31, 2013:

          

Tier I Leverage Capital

  $54,775     7.02 $31,190     >4 $62,380     >8

Tier 1 Risk-based Capital

  $54,775     10.70 $20,484     >4 $N/A     N/A  

Total Risk-based Capital

  $61,274     11.97 $40,968     >8 $56,331     >11

As of December 31, 2012:

          

Tier I Leverage Capital

  $55,157     7.16 $30,835     >4 $61,670     >8

Tier 1 Risk-based Capital

  $55,157     10.22 $21,594     >4 $N/A     N/A  

Total Risk-based Capital

  $62,005     11.49 $43,188     >8 $59,384     >11

The Holding Company is also subject to similarFollowing are the required and actual capital adequacy requirements. At March 31, 2011,amounts and ratios for the Holding Company’s Tier 1 to average assets, Tier 1 to risk weighted assets and total capital to risk weighted assets capital ratios were 7.1%, 10.3%, 11.5% (unaudited). At December 31, 2010, the Holding Company’s Tier 1 to average assets, Tier 1 to risk weighted assets and total capital to risk weighted assets capital ratios were 7.6%, 10.9%, and 12.2%, and its related required capital adequacy ratios were 4%, 4%, and 8%, respectively. The Holding Company had a similar directive to maintain Tier 1 Leverage and Total Risk Based capital at 8% and 12%, respectively.Company:

   Actual  For Capital
Adequacy
Purposes
 
   Amount   Ratio  Amount   Ratio 

As of December 31, 2013:

       

Tier I Leverage Capital

  $53,806     6.90 $31,190     >4

Tier I Risk-based Capital

  $53,806     10.52 $20,459     >4

Total Risk Based Capital

  $60,297     11.79 $40,917     >8

As of December 31, 2012:

       

Tier I Leverage Capital

  $54,219     7.03 $30,835     >4

Tier I Risk-based Capital

  $54,219     10.04 $21,594     >4

Total Risk Based Capital

  $61,067     11.31 $43,188     >8

MACON BANCORP AND SUBSIDIARYSUBSIDIARIES Notes to Consolidated Financial Statements, Continued

 

15.21.Commitments and Contingencies

To accommodate the financial needs of its customers, the Company makes commitments under various terms to lend funds. These commitments include revolving credit agreements, term loan commitments and short-term borrowing agreements. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness. The amount of collateral obtained, if it is deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held includes first and second mortgages on one-to-four family dwellings, accounts receivable, inventory, and commercial real estate. Certain lines of credit are unsecured.

The following summarizes the Company’s approximate commitments to fund lines of credit:credit at December 31, 2013:

 

  March 31, 2011   December 31, 2010 
  (unaudited)     

Home equity and other lines

  $74,081    $72,715    $76,322  

Consumer and other lines

   2,740     2,745     2,548  
          

 

 
  $78,870  
  $76,821    $75,460    

 

 
        

TheAs of December 31, 2013, the Company had outstanding commitments to originate mortgage loans of approximately $338 thousand (unaudited) and $1.5 million at March 31, 2011 and December 31, 2010, respectively. the following:

   Amount   Range of Rates

Fixed

  $671    3.75% to 4.625%

Variable

   100    4.38%
  

 

 

   
  $771    
  

 

 

   

The allowance for unfunded commitments to originate mortgage loans were composed of variable rate loans of $126 thousand (unaudited) and $363 thousand and fixed rate loans of $212 thousand (unaudited) and $1.2 million at March 31, 2011 and December 31, 2010, respectively. The fixed rate loans had interest rates ranging from 4.875% (unaudited) to 5.75% (unaudited) at March 31, 2011 and 3.50% to 4.88%was $86 at December 31, 20102013.

The Company is exposed to loss as a result of its obligation for representations and terms ranging from 15warranties on loans sold to 30 years. Commitments to extend credit at fixed rates expose the Company to some degreeFNMA and maintained a reserve of interest rate risk.$291 as of December 31, 2013.

MACON BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued

In the normal course of business, the Company is periodically involved in litigation. In the opinion of the Company’s management, none of this litigation shouldis expected to have a material adverse effect on the accompanying consolidated financial statements.

MACON BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements, Continued

 

16.22.Condensed Financial Information of Macon Bancorp, Inc.—Parent Company Only

CONDENSED BALANCE SHEETS

 

    March 31,   December 31, 
   2011   2010   2009 
   (unaudited)         

Assets

      

Cash

  $12    $16    $10  

Equity investment in subsidiary

   70,404     79,924     95,473  

Equity investment in trust

   433     433     433  

Other assets

   140     141     148  
               

Total assets

  $70,989    $80,514    $96,064  
               

Liabilities and Equity

      

Junior Subordinated Debentures

  $14,433    $14,433    $14,433  

Other liabilities

   226     113     —    

Equity

   56,330     65,968     81,631  
               

Total liabilities and equity

   70,989    $80,514    $96,064  
               

CONDENSED STATEMENTS OF INCOME

   Three Months Ended
March 31,
  Years Ended December 31, 
   2011  2010  2010  2009  2008 
   (unaudited)  (unaudited)          

Dividends from subsidiary

  $—     $57   $245   $357   $602  

Expenses:

      

Interest

   115    108    455    530    905  

Other

   3    6    35    33    36  
                     
   118    114    490    563    941  
                     

Loss before income taxes and equity in undistributed income of subsidiary

   (118  (57  (245  (206  (339

Income tax benefit allocated from consolidated income tax return

   —      52    132    198    331  
                     

Loss before equity in undistributed income of subsidiary

   (118  (5  (113  (8  (8

Equity in undistributed income (losses) of subsidiary

   (8,779  (232  (14,145  (7,779  6,469  

Net (loss) income

  $(8,897 $(237 $(14,258 $(7,787 $6,461  
                     
   December 31, 
   2013   2012 

Assets

    

Cash

  $475    $341  

Equity investment in Bank

   47,487     56,908  

Equity investment in Trust

   433     433  

Other assets

   123     129  
  

 

 

   

 

 

 

Total assets

  $48,518    $57,811  
  

 

 

   

 

 

 
    

Liabilities and Equity

    

Junior subordinated notes

  $14,433    $14,433  

Accrued interest payable

   1,567     1,084  

Equity

   32,518     42,294  
  

 

 

   

 

 

 

Total liabilities and equity

  $48,518    $57,811  
  

 

 

   

 

 

 

MACON BANCORP AND SUBSIDIARYSUBSIDIARIES Notes to Consolidated Financial Statements, Continued

 

CONDENSED STATEMENTS OF OPERATION

   Years Ended December 31, 
   2013  2012  2011 

Dividends from subsidiaries

  $—     $—     $32  
  

 

 

  

 

 

  

 

 

 

Expenses:

    

Interest

   490    514    469  

Other

   38    43    36  
  

 

 

  

 

 

  

 

 

 
   528    557    505  
  

 

 

  

 

 

  

 

 

 

Loss before income taxes and equity in undistributed income of subsidiaries

   (528  (557  (473

Income tax benefit allocated from consolidated income tax return

   172    195    177  
  

 

 

  

 

 

  

 

 

 

Loss before equity in undistributed income of subsidiaries

   (356  (362  (296

Equity in undistributed income (loss) of subsidiaries

   (59  1,295    (25,684
  

 

 

  

 

 

  

 

 

 

Net income (loss)

  $(415 $933   $(25,980
  

 

 

  

 

 

  

 

 

 

STATEMENTS OF CASH FLOW

 

  March 31, Years Ended December 31,   Years Ended December 31, 
  2011 2010 2010 2009 2008 
  (unaudited) (unaudited)       
Years Ended December 31,  2013 2012 2011 

Cash flows from operating activities:

          

Net income (loss)

  $(8,897 $(237 $(14,258 $(7,787 $6,461    $(415 $933   $(25,980

Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:

      

Equity in undistributed earnings of subsidiary

   8,779    232    14,145    7,779    (6,469

Decrease in other assets

   114    1    119    6    6  

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Equity in undistributed earnings of subsidiaries

   59   (1,295 25,684  

Decrease in other assets and liabilities

   490   515   468  
                  

 

  

 

  

 

 

Net increase used by operating activities

   (4  (4  6    (2  (2
                

Net cash provided by operating activities

   134    153    172  
  

 

  

 

  

 

 

Cash and cash equivalents, beginning

   16    10    10    12    14     341    188    16  
                  

 

  

 

  

 

 

Cash and cash equivalents, ending

  $12   $6   $16   $10   $12    $475   $341   $188  
                  

 

  

 

  

 

 

MACON BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued

 

17.23.Operating Leases

The Bank has entered into operating leases in connection with its retail branch operations. These leases expire at various dates through June 2014.April, 2017. Total rental expense in 2010, 20092013, 2012 and 20082011 for all operating leases was approximately $62, $86$92, $70, and $137.$61.

Following is a schedule of approximate annual future minimum lease payments under operating leases as of December 31, 201022013 that have initial or remaining lease terms in excess of one yearyear:

 

2011

  $55  

2012

   37  

2013

   19  

2014

   9  
     

Total minimum lease commitments

  $120  
     

2014

  $79  

2015

   56  

2016

   48  

2017

   16  

2018

   —    
  

 

 

 

Total minimum lease commitments

  $199  
  

 

 

 

 

224.

There have been no material changes to the Company’s minimum lease commitments since December 31, 2010

MACON BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements, Continued

18.Fair Value Disclosures

The Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC Topic 820 applies only toWe use fair value measurements already required or permitted by other accounting standardswhen recording and does not impose requirements for additional fair value measures. ASC Topic 820 was issued to increase consistency and comparability in reporting fair values.

The Bank uses fair value measurements to record fair value adjustments todisclosing certain financial assets and to determine fair value disclosures. The Bank did not have any liabilities that were measured at fair value at March 31, 2011 or December 31, 2010. From time to time, the Bank may be required to record at fair value other assets or liabilities on a non-recurring basis. These non-recurring fair value adjustments generally involve the write-down of individual assets due to impairment losses.

In accordance with ASC Topic 802-10-35-01, the Bank groups its assets at fair value in three levels, based on the markets in which the assets are tradedliabilities. Securities available-for-sale and the reliability of the assumptions used to determine fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1

Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active exchange market, as well as certain U.S. Treasury, other U.S. Government and agency mortgage-backed debt securities that are highly liquid and are actively traded in over-the-counter markets.

Level 2

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes certain U.S. Government and agency mortgage-backed debt securities, corporate debt securities, derivative contracts and residential mortgage loans held-for-sale.

MACON BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements, Continued

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights and highly structured or long-term derivative contracts.

Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.

Securities Available-for-Sale

Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices of like or similar securities, if available and these securities are classified as Level 1 or Level 2. If quoted prices are not available, fair values are measured using independent pricing models orAdditionally, from time to time, we may be required to record other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions and are classified as Level 3.

Loans Held for Sale

Loans held for sale are carried at the lower of cost or fair value. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, the Company classifies loans held for sale subjected to nonrecurring fair value adjustments as Level 2.

Impaired Loans

The Company does not record loansassets at fair value on a recurring basis. However, from timenonrecurring basis, such as loans held for sale, impaired loans and other real estate owned.

Fair value is the price that would be received to time,sell an asset or paid to transfer a loanliability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. An orderly transaction is considered impaireda transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and an allowancecustomary for loan losses is established. Loans for whichtransactions involving such assets or liabilities; it is probable that payment of interestnot a forced transaction. In determining fair value, we use various valuation approaches, including market, income and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with generally accepted accounting principles.cost approaches. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loansstandard establishes a hierarchy for which theinputs used in measuring fair value that maximizes the use of observable inputs and minimizes the expected repaymentsuse of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing an asset or collateral exceed the recorded investments in such loans. At December 31, 2010, substantially all of the total impaired loans were evaluatedliability, which is developed, based on either the fair valuemarket data we have obtained from independent sources. Unobservable inputs reflect our estimate of the collateralassumptions that market participants would use in pricing an asset or its liquidation value. In accordance with generally accepted accounting principles, impaired loans where an allowance is establishedliability, which are developed based on the fair value of collateral require classificationbest information available in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loancircumstances.

MACON BANCORP AND SUBSIDIARYSUBSIDIARIES Notes to Consolidated Financial Statements, Continued

as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

Real Estate Owned

Real estate owned is recorded at fair value. Fair values are determined by obtaining certified appraisals, a Level 2 measurement.

Loan Servicing Rights

Loan servicing rights are subject to impairment testing. A valuation model, which utilizes a discounted cash flow analysis using interest rates and prepayment speed assumptions currently quoted for comparable instruments and a discount rate determined by management, is used in the completion of impairment testing. If the valuation model reflects a value less than the carrying value, loan servicing rights are adjusted to fair value through a valuation allowance as determined by the model. As such, the Company classifies loan servicing rights subjected to nonrecurring fair value adjustments as Level 3.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

Below is a table that presents information about certain assets and liabilities measured at fair value:

   March 31, 2011 (unaudited) 
   Fair Value Measurement Using     
   Level 1   Level 2   Level 3   Carrying
Amount
   Estimated
Fair  Value
 

Securities available for sale

          

U.S. government agencies

  $—      $26,507    $—      $26,507    $26,507  

Corporate securities

   —       1,023     —       1,023     1,023  

Municipal securities

   —       35,243     —       35,243     35,243  

Mortgage-backed securities

   —       91,500     —       91,500     91,500  

CRA Investment

   —       530     —       530     530  

   December 31, 2010 
   Fair Value Measurement Using     
   Level 1   Level 2   Level 3   Carrying
Amount
   Estimated
Fair  Value
 

Securities available for sale

          

U.S. government agencies

  $—      $53,408    $—      $53,408    $53,408  

Corporate securities

   —       1,023     —       1,023     1,023  

Municipal securities

   —       34,616     —       34,616     34,616  

Mortgage-backed securities

   —       127,223     —       127,223     127,223  

CRA Investment

   —       527     —       527     527  

MACON BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements, Continued

   December 31, 2009 
   Fair Value Measurement Using     
   Level 1   Level 2   Level 3   Carrying
Amount
   Estimated
Fair Value
 
Securities available for sale  $—      $193,577    $—      $193,577    $193,577  

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

Below is a table that presents information about certain assets and liabilities measured at fair value:

   March 31, 2011 (unaudited) 
   Fair Value Measurement Using     
   Level 1   Level 2   Level 3   Carrying
Amount
   Estimated
Fair  Value
 

Impaired loans

   —       —       45,682     45,682     45,682  

Real estate owned

   —       —       23,491     23,491     23,491  

Mortgage servicing rights

   —       —       2,945     2,945     2,945  
   December 31, 2010 
   Fair Value Measurement Using     
   Level 1   Level 2   Level 3   Carrying
Amount
   Estimated
Fair Value
 

Impaired loans

  $—      $—      $47,896    $47,896    $47,896  

Real estate owned

  $—      $—      $21,511    $21,511    $21,511  

Mortgage servicing rights

  $—      $—      $3,108    $3,108    $3,108  
   December 31, 2009 
   Fair Value Measurement Using     
   Level 1   Level 2   Level 3   Carrying
Amount
   Estimated
Fair  Value
 

Impaired loans

  $—      $—      $40,342    $40,342    $40,342  

Real estate owned

  $—      $—      $22,829    $22,829    $22,829  

Mortgage servicing rights

  $—      $—      $3,584    $3,584    $3,584  

MACON BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements, Continued

 

The approximate carrying and estimated fair value of financial instruments are summarized below:

   March 31,   December 31, 
   2011 (unaudited)   2010   2009 
   Carrying
Amount
   Estimated
Fair Value
   Carrying
Amount
   Estimated
Fair Value
   Carrying
Amount
   Estimated
Fair Value
 

Financial assets:

            

Cash and equivalents

  $20,290    $20,290    $18,048    $18,048    $34,344    $34,344  

Securities

   154,803     154,803     216,797     216,797     193,577     193,577  

Loans receivable and held for sale, net

   667,714     664,613     698,519     701,562     754,268     791,902  

Bank owned life insurance

   18,476     18,476     18,315     18,315     17,701     17,701  

Federal Home Loan

            

Bank stock

   10,979     10,979     10,979     10,979     12,288     12,288  

Other assets

   4,005     4,005     4,693     4,693     5,187     5,187  

Financial liabilities:

            

Deposits:

            

Demand accounts

   326,692     326,708     322,019     322,019     268,912     268,912  

Certificate accounts

   455,443     461,314     476,400     482,948     521,496     527,736  

Advances from Federal

            

Home Loan Bank

   65,900     69,119     128,400     133,869     178,400     185,249  

Long-term debt

   14,433     14,433     14,433     14,433     14,433     14,433  

Other liabilities

   896     896     1,242     1,242     1,525     1,525  

hierarchy gives the highest priority to unadjusted quoted market prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). The fair value hierarchy is broken down into three levels based on the reliability of a financial instrumentinputs as follows:

Level 1: valuation is the current amount that would be exchanged between willing parties, other thanbased upon unadjusted quoted market prices for identical instruments traded in a forced liquidation. Fair valueactive markets.

Level 2: valuation is best determined based upon quoted market prices. However,prices for similar instruments traded in many instances, there are noactive markets, quoted market prices for the Bank’s various financial instruments. In cases where quoted market pricesidentical or similar instruments traded in markets that are not available, fair valuesactive and model-based valuation techniques for which all significant assumptions are based on estimates using present valueobservable in the market or can be corroborated by market data.

Level 3: valuation is derived from other valuation techniques. Thosemethodologies, including discounted cash flow models and similar techniques are significantly affected bythat use significant assumptions not observable in the market. These unobservable assumptions used, including the discount rate andreflect estimates of future cash flows. Accordingly,assumptions that market participants would use in determining fair value.

A financial instrument’s level within the fair value estimates may not be realized in an immediate settlement of the instrument. The estimated fair values were determined using the following assumptions:

Cash and Cash Equivalents - The carrying amount of such instruments is deemed to be a reasonable estimate of fair value. Cash includes cash and due from banks and interest-bearing deposits.

Securities - Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

MACON BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements, Continued

Loans - Fair values for loans held for investment and sale are estimated by segregating the portfolio by type of loan and discounting scheduled cash flows using interest rates currently being offered for loans with similar terms, reduced by an estimate of credit losses inherent in the portfolio. A prepayment assumption is used as an estimate of the portion of loans that will be repaid prior to their scheduled maturity.

Bank Owned Life Insurance - Fair values for BOLI are based on cash surrender values provided by third party administrator.

Federal Home Loan Bank Stock - No ready market exists for this stock and it has no quoted market value. However, redemption of this stock has historically been at par value. Accordingly, the carrying amount is deemed to be a reasonable estimate of fair value.

Deposits - The fair values disclosed for demand deposits are, as required by ASC 825-10, equal to the amounts payable on demand at the reporting date (i.e., their stated amounts). The fair value of certificates of deposit are estimated by discounting the amounts payable at the certificate rates using the rates currently offered for deposits of similar remaining maturities.

Advances from the FHLB - The estimated fair value of advances from the FHLBhierarchy is based on discounting amounts payable at contractual rates using current market rates for advances with similar maturities.

Advances from the Federal Reserve Bank - Since all FRB Borrowings mature within three months,lowest level of input that is significant to the carrying amounts of such instruments are deemed to be a reasonable estimate of fair value.

Repurchase Agreement - The carrying amount of the repurchase agreement is deemed to be a reasonable estimate of fair value due to its short-term maturity.

Long-Term Debt - The long-term debt is a variable rate debt and is tied to the LIBOR rate. The cost approximates fair value.

Other Assets and Other Liabilities - Other assets represent accrued interest receivable and time deposits with other institutions; other liabilities represent advances from borrowers for taxes and insurance and accrued interest payable. Since these financial instruments will typically be received or paid within three months or are convertible to cash, the carrying amounts of such instruments are deemed to be a reasonable estimate of fair value.

MACON BANCORP AND SUBSIDIARYNotes to Consolidated Financial Statements, Continued

measurement.

Fair value estimates are made at a specific point of time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale the Company’s entire holdings of a particular financial instrument. Because no active market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, current interest rates and prepayment trends, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in any of these assumptions used in calculating fair value also would affect significantly the estimates. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

19.Contingencies and Management’s Plans

In connection withFollowing is a slow economy,description of valuation methodologies used for assets and more specifically, withliabilities recorded at fair value on a recurring basis:

Securities

We obtain fair values for debt securities from a third-party pricing service, which utilizes several sources for valuing fixed-income securities. The market evaluation sources for debt securities include observable inputs rather than significant unobservable inputs and are classified as Level 2. The service provider utilizes pricing models that vary by asset class and include available trade, bid and other market information. Generally, the real estate market, the Company recorded net losses of $14.2 million for the year ended December 31, 2010methodologies include broker quotes, proprietary models, vast descriptive terms and $7.8 million for the year ended December 31, 2009. These losses were primarily the result of increases in provisions for loan losses during the period, compounded by a tightening interest margin resulting from increased amounts of non-accrual loans. Furthermore, the Company recorded a valuation allowance relating to deferred tax assets during the year ended December 31, 2010 of $8.5 million which also negatively impacted the Company’s earnings. Also,conditions databases, as of December 31, 2010, the Bank’s Tier 1 Leverage ratio was 7.7%, falling below the mandated Tier 1 well capitalized ratio. The Bank continues to meet its well capitalized Total Risk Based Capital Ratio of 10% and its well capitalized Tier 1 to total Risk Based Assets ratio of 6%.as extensive quality control programs.

MACON BANCORP AND SUBSIDIARYSUBSIDIARIES Notes to Consolidated Financial Statements, Continued

 

Management’s PlansIncluded in securities is an investment in an exchange traded bond fund which is valued by reference to quoted market prices and Actionsconsidered a Level 1 security. Also included in securities is an investment in a private equity fund which is valued by reference to the audited financial statements. Because the underlying assets in the private equity fund are comprised primarily of investments in private companies without a quoted market value, the investment is considered a Level 3 investment.

Loan Servicing Rights

Loan servicing rights are carried at fair value as determined by a third party valuation firm. The valuation model utilizes a discounted cash flow analysis using discount rates and prepayment speed assumptions used by market participants. The Company classifies loan servicing right fair value measurements as Level 3.

Derivative Instruments

Derivative instruments include interest rate lock commitments and forward sale commitments. These instruments are valued based on the change in the value of the underlying loan between the commitment date and the end of the period. The Company classifies these instruments as Level 3.

Following is a description of valuation methodologies used for assets and liabilities recorded at fair value on a nonrecurring basis:

Loans Held for Sale

Loans held for sale are carried at the lower of cost or fair value. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. Loans held for sale carried at fair value are classified as Level 2.

Impaired Loans

Impaired loans are carried at the lower of recorded investment or fair value. The fair value of impaired loans is estimated using either the value of the collateral (less selling costs if repayment is expected from liquidation of the collateral) or discounted cash flows. Appraisals may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or our knowledge of the borrower and the borrower’s business. Impaired loans carried at fair value are classified as Level 3.

Real Estate Owned

Real estate owned obtained in partial or total satisfaction of a loan is recorded at the lower of recorded investment in the loan or fair value less cost to sell. Subsequent to foreclosure, these assets are carried at the lower of the amount recorded at acquisition date or fair value less cost to sell. Accordingly, it may be necessary to record nonrecurring fair value adjustments.

MACON BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued

Fair value, when recorded, is generally based upon appraisals by approved, independent, state certified appraisers. Like impaired loans, appraisals may be discounted based on our historical knowledge, changes in market conditions from the time of appraisal or other information available to us. Real estate owned carried at fair value is classified as Level 3.

In addition to financial instruments recorded at fair value in our financial statements, fair value accounting guidance requires disclosure of the fair value of all of an entity’s assets and liabilities that are considered financial instruments. The majority of our assets and liabilities are considered financial instruments. Many of these instruments lack an available trading market as characterized by a willing buyer and willing seller engaged in an exchange transaction. Also, it is our general practice and intent to hold our financial instruments to maturity and to not engage in trading or sales activities. For fair value disclosure purposes, we substantially utilize the fair value measurement criteria as required and explained above. In cases where quoted fair values are not available, we use present value methods to determine the fair value of our financial instruments.

Following is a description of valuation methodologies used for the disclosure of the fair value of financial instruments not carried at fair value:

Cash and Cash Equivalents

The carrying amount of such instruments is deemed to be a reasonable estimate of fair value.

Loans

The fair value of variable rate performing loans is based on carrying values adjusted for credit risk. The fair value of fixed rate performing loans is estimated using discounted cash flow analyses, utilizing interest rates currently being offered for loans with similar terms, adjusted for credit risk. The fair value of nonperforming loans is based on their carrying values less any specific reserve. A prepayment assumption is used to estimate of the portion of loans that will be repaid prior to their scheduled maturity. No adjustment has been made for the illiquidity in the market for loans as there is no active market for many of the Company’s loans on which to reasonably base this estimate.

Bank Owned Life Insurance

Fair values approximate net cash surrender values.

Federal Home Loan Bank Stock

No ready market exists for this stock and it has no quoted market value. However, redemption of this stock has historically been at par value. Accordingly, the carrying amount is deemed to be a reasonable estimate of fair value.

Real Estate Held for Investment

The property is carried at its original appraised value less accumulated depreciation. Fair value is deemed to approximate carrying value as the Company has already undertaken the following actions, among other things, to strengthen its capital position and improve future operating results:obtained a recent appraisal.

MACON BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued

 

During 2010,Deposits

The fair values disclosed for demand deposits are equal to the Company’s total assets shrunkamounts payable on demand at the reporting date. The fair value of certificates of deposit are estimated by $71 milliondiscounting the amounts payable at the certificate rates using the rates currently offered for deposits of similar remaining maturities.

Advances from the FHLB

The fair values disclosed for fixed rate long-term borrowings are determined by discounting their contractual cash flows using current interest rates for long-term borrowings of similar remaining maturities. The carrying amounts of variable rate long-term borrowings approximate their fair values.

Junior Subordinated Notes

The carrying amount approximates fair value because the debt is variable rate tied to strengthen capital ratios. Management continuesLIBOR .

Accrued Interest Receivable and Payable

Since these financial instruments will typically be received or paid within three months, the carrying amounts of such instruments are deemed to evaluate asset reduction strategies to further improve capital ratios without sacrificing earning assets.be a reasonable estimate of fair value.

Loan Commitments

The Company’s funding mix has also improved dramatically. During 2010,Estimates of the levelfair value of FHLB advances decreased by $50 million,these off-balance sheet items are not made because of the short-term nature of these arrangements and the levelcredit standing of brokered deposits decreasedthe counterparties.

MACON BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

Below is a table that presents information about certain assets and liabilities measured at fair value on a recurring basis as of December 31. Forward sale commitment and interest rate lock commitment derivative amounts were immaterial at December 31, 2012.

   2013 
   Level 1   Level 2   Level 3   Total 

Securities available for sale:

        

U.S. government agencies

  $—       21,899     —       21,899  

Municipal securities

   —       25,602     —       25,602  

Mortgage-backed securities

   —       107,415     —       107,415  

Mutual fund

   568     —       —       568  
  

 

 

   

 

 

   

 

 

   

 

 

 
   568     154,916     —       155,484  

Mortgage servicing rights

   —       —       1,883     1,883  

Forward sales commitments

   —       —       12     12  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $568     154,916     1,895     157,379  
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest rate lock commitments

   —       —       7     7  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

  $—       —       7     7  
  

 

 

   

 

 

   

 

 

   

 

 

 
   2012 
   Level 1   Level 2   Level 3   Total 

Securities available for sale:

        

U.S. government agencies

  $—       29,741     —       29,741  

Municipal securities

   —       18,943     —       18,943  

Mortgage-backed securities

   —       81,822     —       81,822  

Mutual fund

   585     —       —       585  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Assets

   585     130,506     —       131,091  

Mortgage servicing rights

   —       —       1,908     1,908  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $585     130,506     1,908     132,999  
  

 

 

   

 

 

   

 

 

   

 

 

 

MACON BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued

The following table presents the changes in assets measured at fair value on a recurring basis for which we have utilized Level 3 inputs to determine fair value as of and for the years ended December 31.

   2013  2012 

Balance at beginning of year

  $1,908    2,319  

Mortgage servicing right activity, included in Servicing income, net

   

Capitalization from loans sold

   736    461  

Fair value adjustment

   (761  (872

Mortgage derivative gains (losses) included in Other income

   5    —    
  

 

 

  

 

 

 

Balance at end of year

  $1,888    1,908  
  

 

 

  

 

 

 

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

Below is a table that presents information about certain assets and liabilities measured at fair value on a nonrecurring basis as of December 31. There were no loans held for sale carried at fair value at either December 31, 2013 or 2012.

   2013 
   Level 1   Level 2   Level 3   Total 

Loans held for sale

  $—       —       —       —    

Impaired loans

   —       —       36,002     36,002  

Real estate owned

   —       —       10,506     10,506  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $—       —       46,508     46,508  
  

 

 

   

 

 

   

 

 

   

 

 

 
   2012 
   Level 1   Level 2   Level 3   Total 

Loans held for sale

   —       —       —       —    

Impaired loans

   —       —       31,350     31,350  

Real estate owned

   —       —       19,755     19,755  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $—       —       51,105     51,105  
  

 

 

   

 

 

   

 

 

   

 

 

 

MACON BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued

The following table provides information describing the unobservable inputs used in Level 3 fair value measurements at December 31, 2013.

Valuation

Technique

Unobservable Input

General

Range

Impaired loans

Discounted AppraisalsCollateral discounts and estimated selling cost0 – 30%
Present value of cash flowsDefault rates0 –10%

Real estate owned

Discounted AppraisalsCollateral discounts and estimated selling cost0 – 30%

Mortgage servicing rights

Discounted Cash FlowsPrepayment Speed7 – 30%
Discount rate12%

Forward sales commitments and interest rate lock commitments

Change in market price of underlying loanValue of underlying loan95% – 105%

MACON BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued

The approximate carrying and estimated fair value of financial instruments are summarized below:

       Fair Value Measurements at December 31, 2013 
   Carrying
Amount
   Total   Level 1   Level 2   Level 3 

Assets:

          

Cash and equivalents

  $34,316     34,316     34,316      

Securities available for sale

   155,484     155,484     568     154,916    

Securities held to maturity

   20,988     20,098       20,098    

Loans held for sale

   5,688     6,151       6,151    

Loans receivable, net

   507,623     526,395         526,395  

Real estate owned

   10,506     10,506         10,506  

Federal Home Loan Bank stock

   2,724     2,724       2,724    

Interest receivable

   2,673     2,673         2,673  

Bank owned life insurance

   19,961     19,961         19,961  

Real estate held for investment

   2,489     2,489         2,489  

Mortgage servicing rights

   1,883     1,883         1,883  

Forward sales commitments

   12     12         12  

Liabilities:

          

Demand deposits

  $360,869     360,869         360,869  

Certificate deposits

   323,357     327,280         327,280  

Federal Home Loan Bank advances

   40,000     41,845         41,845  

Junior subordinated debentures

   14,433     14,433         14,433  

Accrued interest payable

   2,023     2,023         2,023  

Interest rate lock commitments

   7     7         7  

MACON BANCORP AND SUBSIDIARIESNotes to Consolidated Financial Statements, Continued

       Fair Value Measurements at December 31, 2012 
   Carrying
Amount
   Total   Level 1   Level 2   Level 3 

Assets:

          

Cash and equivalents

  $25,362     25,362     25,362      

Securities available for sale

   131,091     131,091     585     130,506    

Loans held for sale

   745     745       745    

Loans receivable

   545,850     569,324         569,324  

Real estate owned

   19,755     19,755         19,755  

Federal Home Loan Bank stock

   2,437     2,437       2,437    

Interest receivable

   2,682     2,682         2,682  

Bank owned life insurance

   19,479     19,479         19,479  

Mortgage servicing rights

   1,908     1,908         1,908  

Liabilities:

          

Demand deposits

  $345,109     345,109         345,109  

Certificate deposits

   329,979     334,512         334,512  

Federal Home Loan Bank advances

   25,000     27,692         27,692  

Junior subordinated debentures

   14,433     14,433         14,433  

Accrued interest payable

   1,464     1,464         1,464  

25.Subsequent Events

On January 23, 2014, the Boards of Directors of Macon Bancorp and its subsidiary Macon Bank, Inc. unanimously adopted a plan of conversion to convert Bancorp from the mutual to the stock form of ownership. The plan is subject to approval by $39 million. Scheduled maturities for 2011 include $74 millionmembers holding a majority of brokered deposits and $40 million of FHLB advances.

the votes eligible to be cast on the conversion proposal. The Board of Directors has approved a plan to convert the Company from mutual ownership to stock ownership, which is expected to result in a significant capital raise for the Company. Estimated completionGovernors of the stock offering will likely fall in the third quarter of 2011.

Management continues to explore various methods to dispose of non-performing assets, including note sales, event sales, and packaged sales to investors.

The Company has supplemented its management team with additional expertise in commercial banking, credit administration, and SEC reporting.

Management plans to diversify its loan portfolio, shifting from a heavy reliance on real estate lending to more commercial and industrial lending. Government guaranteed lending programs are also to be expanded.

In order to improve earnings and capital, management is currently considering various strategies such as: plans for capital injectionsFederal Reserve System and the reductionNorth Carolina Commissioner of classified assets. For many institutions,Banks must also approve the ability to accomplish these goals is significantly constricted by the current economic environment. The unique value proposition of a mutual conversion is expected to attract investors whobefore it may not otherwise be interested in a subsequent offering of a stock organization with a similar profile of the Company. The ability to decrease levels of non-performing assets is also vulnerable to market conditions as many of the Bank’s borrowers rely on an active real estate market as a source of repayment. Management has seen increased activity on note sales and OREO disposals in recent months.become effective.

*****

You should rely only on the information contained in this document or that to which we have referred you. No person has been authorized to give any information or to make any representation other than as contained in this prospectus and, if given or made, such other information or representation must not be relied upon as having been authorized by us, Macon Bancorp or Macon Bank, Inc. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any of the securities offered hereby to any person in any jurisdiction in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such offer or solicitation in such jurisdiction. Neither the delivery of this prospectus nor any sale hereunder shall under any circumstances create any implication that there has been no change in our affairs or the affairs of Macon Bancorp or Macon Bank, IncInc. since any of the dates as of which information is furnished herein or since the date hereof.

Up to 5,750,0004,945,000 Shares of

COMMON STOCK

$10.00 per share

(Subject to Increase to up to 6,612,5005,686,750 Shares)

MaconEntegra Financial Corp.

(Proposed Holding Company for Macon Bank, Inc.)

PROSPECTUS

Raymond James

Sandler O’Neill & Associates, Inc.Partners, L.P.

[Prospectus Date]

Until [expiration date] or [25 days] after commencement of the syndicated offering, if any, whichever is later, all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver the prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.


PART II:INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution

      Amount (1) 
1.  Registrant’s Legal Fees and Expenses  $275,000  
2.  Registrant’s Accounting Fees and Expenses  $125,000  
3.  Conversion Agent and Data Processing Fees  $30,000  
4.  Marketing Agent Fees(1)  $649,177  
5.  Marketing Agent Expenses (Including Legal Fees and Expenses)  $130,000  
6.  Appraisal Fees and Expenses  $78,000  
7.  Printing, Postage and Mailing Fees  $205,000  
8.  Filing Fees (NASDAQ, FINRA and SEC)  $145,000  
9.  Transfer Fees and Expenses  $15,000  
10.  Business Plan Fees and Expenses  $27,000  
11.  Other  $35,000  
    

 

 

 
12.  Total  $1,714,177  
    

 

 

 

 

Item 13.(1)Other Expenses of Issuance and Distribution

      Amount(1) 

*

  Registrant’s Legal Fees and Expenses  $350,000  

*

  Registrant’s Accounting Fees and Expenses   75,000  

*

  Conversion Agent and Data Processing Fees   41,825  

*

  Marketing Agent Fees(1)   2,457,188  

*

  Marketing Agent Expenses (Including Legal Fees and Expenses)   150,000  

*

  Appraisal Fees and Expenses   60,000  

*

  Printing, Postage, Mailing and EDGAR Fees   125,000  

*

  Filing Fees (NASDAQ, FINRA and SEC)   70,000  

*

  Transfer Fees and Expenses   12,500  

*

  Business Plan Fees and Expenses   25,000  

*

  Loan Review   140,000  

*

  Other   50,000  
       

*

  Total  $3,556,513  
       
*Estimated

(1)Macon Financial Corp. hasWe have retained Raymond James & Associates, Inc.Sandler O’Neill to assist in the sale of common stock on a best efforts basis in the offerings. Fees are estimated at the adjusted maximum of the offering range. Amount includes selling commissions payable by us to Sandler O’Neill in connection with the offering equal to (i) 1.0% of the aggregate purchase price of the shares sold in the subscription offering, assumed to equal 75% of the total offering, plus (ii) 1.75% of the aggregate purchase price of the shares sold in the community offering, assumed to equal 25% of the total offering; except that no fee will be paid with respect to shares purchased by our directors, officers and employees or members of their immediate families. To the extent shares remain available after the subscription and community offerings, we may also offer for sale, shares of common stock to the general public in a “syndicated offering.” Sandler O’Neill and other selected dealers will receive aggregate fees not to exceed 5.5% of the aggregate price of shares sold in the syndicated offering, if any.

Item 14. Indemnification of Directors and Officers

Item 14.Indemnification of Directors and Officers

The North Carolina Business Corporation Act (“NCBCA”) provides for indemnification by a corporation of its officers, directors, employees and agents, and any person who is or was serving at the corporation’s request as a director, officer, employee or agent of another entity or enterprise or as a trustee or administrator under an employee benefit plan, against liability and expenses, including reasonable attorneys’ fees, in any proceeding (including without limitation a proceeding brought by or on behalf of the corporation itself) arising out of their status as such or their activities in any of the foregoing capacities.

Permissible indemnification.Under the NCBCA, a corporation may, but is not required to, indemnify any such person against liability and expenses incurred in any such proceeding, provided such

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person conducted himself or herself in good faith and (1)(i) in the case of conduct in his or her official capacity, reasonably believed that his or her conduct was in the corporation’s best interests, and (2)(ii) in all other cases, reasonably believed that his or her conduct was at least not opposed to the corporation’s best interests; and, in the case of a criminal proceeding, where he or she had no reasonable cause to believe his or her conduct was unlawful. However, a corporation may not indemnify such person either in connection with a proceeding by or in the right of the corporation in which such person was adjudged liable to the corporation, or in connection with any other proceeding charging improper personal benefit to such person (whether or not involving action in an official capacity) in which such person was adjudged liable on the basis that personal benefit was improperly received.

Mandatory indemnification.Unless limited by the corporation’s charter, the NCBCA requires a corporation to indemnify a director or officer of the corporation who is wholly successful, on the merits or otherwise, in the defense of any proceeding to which such person was a party because he or she is or was a director or officer of the corporation against reasonable expenses incurred in connection with the proceeding.

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Advance for expenses.Expenses incurred by a director, officer, employee or agent of the corporation in defending a proceeding may be paid by the corporation in advance of the final disposition of the proceeding as authorized by the board of directors of the specific case, or as authorized by the charter or bylaws or by any applicable resolution or contract, upon receipt of an undertaking by or on behalf of such person to repay amounts advanced unless it ultimately is determined that such person is entitled to be indemnified by the corporation against such expenses.

Court-ordered indemnification.Unless otherwise provided in the corporation’s charter, a director or officer of the corporation who is a party to a proceeding may apply for indemnification to the court conducting the proceeding or to another court of competent jurisdiction. On receipt of an application, the court, after giving any notice the court deems necessary, may order indemnification if it determines either (1)(i) that the director or officer is entitled to mandatory indemnification as described above, in which case the court also will order the corporation to pay the reasonable expenses incurred to obtain the court-ordered indemnification, or (2)(ii) that the director or officer is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, whether or not such person met the requisite standard of conduct or was adjudged liable to the corporation in connection with a proceeding by or in the right of the corporation or on the basis that personal benefit was improperly received in connection with any other proceeding so charging (but if adjudged so liable, indemnification is limited to reasonable expenses incurred).

Voluntary indemnification.In addition to and separate and apart from “permissible” and “mandatory” indemnification described above, a corporation may, by charter, bylaw, contract, or resolution, indemnify or agree to indemnify any one or more of its directors, officers, employees or agents against liability and expenses in any proceeding (including any proceeding brought by or on behalf of the corporation itself) arising out of their status as such or their activities in any of the foregoing capacities. However, the corporation may not indemnify or agree to indemnify a person

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against liability or expenses he may incur on account of activities which were at the time taken, known or believed by such person to be clearly in conflict with the best interests of the corporation. Any provision in a corporation’s charter or bylaws or in a contract or resolution may include provisions for recovery from the corporation of reasonable costs, expenses and attorney’s fees in connection with the enforcement of rights to indemnification granted therein and may further include provisions establishing reasonable procedures for determining and enforcing such rights.

Parties entitled to indemnification.The NCBCA defines “director” to include ex-directors and the estate or personal representative of a director. Unless its charter provides otherwise, a corporation may indemnify and advance expenses to an officer, employee or agent of the corporation to the same extent as to a director and also may indemnify and advance expenses to an officer, employee or agent who is not a director to the extent, consistent with public policy, as may be provided in its charter or bylaws, by general or specific action of its board of directors, or by contract.

Indemnification by Macon Financial.Entegra.Macon Financial’sEntegra’s Articles and Bylaws provide for indemnification of Macon Financial’sEntegra’s directors and officers to the fullest extent permitted by applicable law.

Insurance.The NCBCA provides that a corporation may purchase and maintain insurance on behalf of an individual who is or was a director, officer, employee or agent to the corporation against certain liabilities incurred by such persons, whether or not the corporation is otherwise authorized under North Carolina law to indemnify such party. Macon FinancialEntegra currently maintains directors’ and officers’ insurance policies covering its directors and officers.

Summary Only.The foregoing is only a general summary of certain aspects of North Carolina law dealing with indemnification of directors and officers and does not purport to be complete. It is qualified in its entirety by reference to the relevant statutes, which contain detailed specific provisions regarding the circumstances under which, and the person for whose benefit, indemnification shall or may be made.

 

Item 15.Recent Sales of Unregistered Securities

Not Applicable.

Item 16. Exhibits and Financial Statement Schedules:

Item 16.Exhibits and Financial Statement Schedules:

The exhibits and financial statement schedules filed as part of this registration statement are as follows:

(a)List of Exhibits

(a)List of Exhibits

 

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1.1Engagement Letter (offering services) between Macon Bancorp, Macon Financial Corp.,Bank, Inc. and Sandler O’Neill & Partners, L.P.
  1.2Engagement Letter (records management services) between Macon Bancorp, Macon Bank, Inc. and Raymond JamesSandler O’Neill & Associates, Inc.Partners, L.P.

1.2
  1.3Form of Agency Agreement between Macon Bancorp, MaconEntegra Financial Corp., Macon Bank, Inc. and Raymond JamesSandler O’Neill & Associates, Inc.Partners, L.P. *

2Plan of Conversion

 

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3.1Articles of Incorporation of MaconEntegra Financial Corp., as amended and restated

3.2Bylaws of MaconEntegra Financial Corp., as amended and restated

4Form of Common Stock Certificate of Macon Financial Corp.

5Form of Opinion of Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P. regarding legality of securities being registered

8Form of Tax Opinion of Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P.

10.1Form of Employment and Change of Control Agreement among Roger D. Plemens, Macon BancorpEntegra Financial Corp. and Macon Bank, Inc. †

10.2Form of Employment and Change of Control Agreement among W. David Sweatt, Macon BancorpRyan M. Scaggs, Entegra Financial Corp. and Macon Bank, Inc. †

10.3Form of Employment and Change of Control Agreement among Gary L. Brown, Macon BancorpDavid A. Bright, Entegra Financial Corp. and Macon Bank, Inc. †

10.4Form of Macon Bank, Inc. Severance and Non-Competition Agreement between Macon Bank, Inc. and each of (i) Carolyn H. Huscusson, (ii) Bobby D. Sanders, II, (iii) Laura W. Clark, and (iv) Marcia J. Ringle. †

10.5Form of Agreement of Merger between Macon Bancorp and MaconEntegra Financial Corp.

10.6Amended and Restated Trust Agreement, regarding Trust Preferred Securities, dated as of December 30, 2003
10.7Guarantee Agreement, regarding Trust Preferred Securities, dated as of December 30, 2003
10.8Junior Subordinated Indenture, regarding Trust Preferred Securities, dated as of December 30, 2003
10.9Consent Order between Macon Bank, Inc., and the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks, dated March 26, 2012.
10.10Written Agreement between Macon Bancorp and the Federal Reserve Bank of Richmond, dated July 20, 2012.
21Subsidiaries of Registrant

23.1Consent of Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P. (contained in Opinions included as Exhibits 5 and 8)

23.2Consent of Dixon Hughes Goodman LLP

23.3Consent of RP Financial, LC.LC

24Power of Attorney (set forth on signature page)

 

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99.1Appraisal Agreement between Macon Bancorp, Macon Bank, Inc. and RP Financial, LC.

99.2Letter of RP Financial, LC. with respect to Subscription Rights

99.3Appraisal Report of RP Financial, LC. **

99.4Marketing Materials*Materials *

99.5Stock Order and Certification Form*Form *

99.6Business Plan Agreement with Monroe Securities, Inc.Keller & Company

99.7Conversion Agent Proposal by Ellen Philip Associates, Inc.

99.8Letter of RP Financial, LC. with respect to Liquidation Account

 

Management contract or compensation plan or arrangement.
*To be filed supplementallysupplementally.
**Supporting financial schedules filed in paper format only pursuant to Rule 202 of Regulation S-T. Available for inspection during business hours at the principal offices of the SEC in Washington, D.C.

(b) Financial Statement Schedules

(b)Financial Statement Schedules

No financial statement schedules are filed because the required information is not applicable or is included in the Consolidated Financial Statements or related notes.

Item 17. Undertakings

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Item 17.Undertakings

The undersigned Registrant hereby undertakes:

 

 (1)(i)To file, during any period in which it offers or sales are being made, a post-effective amendment to this registration statement:

 

 (i)(a)To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;

 

 (ii)(b)To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement;

 

 (iii)(c)To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.

 

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 (2)(ii)That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

 (3)(iii)To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

 

 (4)(iv)Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act of 1933, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue.

 

 (5)(v)That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities:

 

 (6)(vi)That, for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of this registration statement as of the time it was declared effective.

 

 (7)(vii)That, for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

 

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 (8)(viii)The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.

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The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:

 

 (i)Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;

 

 (ii)Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;

 

 (iii)The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and

 

 (iv)Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.

 

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in Franklin, North Carolina on June 10, 2011.March 17, 2014.

 

MACONENTEGRA FINANCIAL CORP.
By: 

/s/ Roger D. Plemens

 Roger D. Plemens
 President, Chief Executive Officer and Director
 (Duly Authorized Representative)

POWER OF ATTORNEY

We, the undersigned directors and officers of MaconEntegra Financial Corp. (the “Company”) hereby severally constitute and appoint Roger D. Plemens and W. David Sweatt,A. Bright, and each of them, with full power to act without the other as our true and lawful attorneys-in-fact and agents, to do any and all things in our names in the capacities indicated below which they may deem necessary or advisable to enable the Company to comply with the Securities Act of 1933, and any rules, regulations and requirements of the SEC, in connection with the registration statement on Form S-1 relating to the offering of the Company’s common stock, including specifically, but not limited to, power and authority to sign for us in our names in the capacities indicated below the registration statement and any and all amendments (including post-effective amendments) thereto; and we hereby approve, ratify and confirm all that our said attorneys-in-fact and agents shall do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement on Form S-1 has been signed below by the following persons in the capacities indicated on June 10, 2011.March 17, 2014.

 

/s/ Roger D. Plemens

Roger D. Plemens

 

President, Chief Executive Officer and Director

Roger D. Plemens(Principal Executive Officer)

/s/ Ryan M. Scaggs

Ryan M. ScaggsDavid A. Bright

 

First Vice President and Chief Financial Officer

David A. Bright(Principal Financial and Accounting Officer)

/s/ Fred H. Jones

Fred H. Jones

  Chairman
Fred H. Jones

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/s/ Stan M. Jeffress

Vice Chairman
Stan M. Jeffress

/s/ Ronald D. Beale

Ronald D. Beale

  Director
Ronald D. Beale

/s/ Louis E. Buck, Jr,

Director
Louis E. Buck, Jr.

/s/ Adam W. Burrell MD

Adam W. Burrell, MD

  Director
Adam W. Burrell

Jim/s/ Charles M. GarnerEdwards

  Director
Charles M. Edwards

/s/ StanJim M. JeffressGarner

Stan M. Jeffress

  Director
Jim M. Garner

/s/ Beverly W. Mason

Beverly W. Mason

  Director

/s/ Edward R. Shatley

Edward R. Shatley

Beverly W. Mason
 Director

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/s/ W. David Sweatt

Director
W. David Sweatt  

 

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