Entegra Financial (ENFC) 10-Q 2016 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the quarterly period ended:

March 31, 2016

Commission File Number: 001-35302

Entegra Financial Corp.
(Exact name of Registrant as specified in its Charter)

North Carolina	45-2460660
(State of Incorporation)	(I.R.S. Employer Identification No.)
14 One Center Court,
Franklin, North Carolina	28734
(Address of principal executive offices)	(Zip Code)

(828) 524-7000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesxNoo

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). YesxNoo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One)

Large accelerated filero Accelerated filerx Non-accelerated filero Smaller reporting companyo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) YesoNox

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: On May 9, 2016, 6,466,375 shares of the issuer’s common stock (no par value), were issued and outstanding.

1 

ENTEGRA FINANCIAL CORP. AND SUBSIDIARY

FORM 10-Q
TABLE OF CONTENTS

		Page No.
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	3
	Consolidated Balance Sheets – March 31, 2016 and December 31, 2015	3
	Consolidated Statements of Income – Three Months Ended March 31, 2016 and 2015	4
	Consolidated Statements of Comprehensive Income – Three Months Ended March 31, 2016 and 2015	5
	Consolidated Statements of Changes in Shareholders’ Equity – Three Months Ended March 31, 2016 and 2015	6
	Consolidated Statements of Cash Flows – Three Months Ended March 31, 2016 and 2015	7
	Notes to Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	62
Item 4.	Controls and Procedures	64
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	65
Item 1A.	Risk Factors	65
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	65
Item 3.	Defaults Upon Senior Securities	65
Item 4.	Mine Safety Disclosures	65
Item 5.	Other Information	65
Item 6.	Exhibits	66
	Signatures	68

2 

Item 1. Financial Statements

ENTEGRA FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)

	March 31,			December 31,
	2016			2015
	(Unaudited)			(Audited)
Assets
Cash and due from banks	$	7,279		$	8,421
Interest-earning deposits		38,621			32,229
Cash and cash equivalents		45,900			40,650
Investments - trading		4,841			4,714
Investments - available for sale		260,049			238,862
Investments - held to maturity (fair value of $34,732 and $41,812 at March 31, 2016 and December 31, 2015, respectively)		34,035			41,164
Other investments, at cost		9,374			8,834
Loans held for sale		5,182			8,348
Loans receivable		632,895			624,072
Allowance for loan losses		(9,498	)		(9,461	)
Fixed assets, net		17,524			17,673
Real estate owned		5,430			5,369
Interest receivable		3,816			3,554
Bank owned life insurance		20,964			20,858
Net deferred tax asset		16,839			18,830
Loan servicing rights		2,398			2,344
Goodwill		711			711
Core deposit intangible		569			590
Other assets		4,017			4,304
Total assets	$	1,055,046		$	1,031,416
Liabilities and Shareholders’ Equity
Liabilities:
Deposits	$	720,712		$	716,617
Federal Home Loan Bank advances		163,500			153,500
Junior subordinated notes		14,433			14,433
Other borrowings		2,547			2,198
Post employment benefits		10,253			10,224
Accrued interest payable		250			213
Other liabilities		9,113			2,762
Total liabilities		920,808			899,947
Commitments and contingencies (Note 11)
Shareholders’ Equity:
Preferred stock - no par value, 10,000,000 shares authorized; none issued and outstanding		—			—
Common stock - no par value, 50,000,000 shares authorized; 6,472,372 and 6,546,375 shares issued and outstanding as of March 31, 2016 and December 31, 2015, respectively		—			—
Common stock held by Rabbi Trust, at cost; 14,000 shares at March 31, 2016 and December 31, 2015		(279	)		(279	)
Additional paid in capital		62,667			63,722
Retained earnings		71,129			69,762
Accumulated other comprehensive gain (loss)		721			(1,736	)
Total shareholders’ equity		134,238			131,469
Total liabilities and shareholders’ equity	$	1,055,046		$	1,031,416

The accompanying notes are an integral part of the consolidated financial statements.

3 

ENTEGRA FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands, except per share data)

	Three Months Ended March 31,
	2016		2015
	(Unaudited)		(Unaudited)
Interest income:
Interest and fees on loans	$	7,206	$	6,470
Interest on tax exempt loans		45		26
Taxable securities		1,458		1,236
Tax-exempt securities		143		70
Interest-earning deposits		36		24
Other		105		58
Total interest income		8,993		7,884
Interest expense:
Deposits		942		1,209
Federal Home Loan Bank advances		275		205
Junior subordinated notes		126		112
Other borrowings		26		26
Total interest expense		1,369		1,552
Net interest income		7,624		6,332
Provision for loan losses		—		(1,500	)
Net interest income after provision for loan losses		7,624		7,832
Noninterest income:
Servicing income, net		116		86
Mortgage banking		140		255
Gain on sale of SBA loans		334		211
Gain on sale of investments, net		269		164
Service charges on deposit accounts		394		298
Interchange fees		342		278
Bank owned life insurance		107		129
Other		173		118
Total noninterest income		1,875		1,539
Noninterest expenses:
Compensation and employee benefits		4,010		3,697
Net occupancy		817		702
Federal deposit insurance		176		284
Professional and advisory		212		250
Data processing		351		280
Merger-related expenses		145		—
Net cost of operation of real estate owned		286		216
Other		1,282		1,147
Total noninterest expenses		7,279		6,576
Income before taxes		2,220		2,795
Income tax expense		854		180
Net income	$	1,366	$	2,615
Earnings per share - basic and diluted	$	0.21	$	0.40
Average shares outstanding - basic		6,517,753		6,546,375
Average shares outstanding - diluted		6,517,955		6,546,375

The accompanying notes are an integral part of the consolidated financial statements.

4 

ENTEGRA FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands)

	Three Months Ended March 31,
	2016			2015
Net income	$	1,366		$	2,615
Other comprehensive income:
Change in unrealized holding gains and losses on securities available for sale		3,455			2,020
Reclassification adjustment for securities gains realized in net income		(269	)		(164	)
Amortization of unrealized loss on securities transferred to held to maturity		431			49
Change in deferred tax valuation allowance attributable to unrealized gains and losses on investment securities available for sale		201			729
Other comprehensive income, before tax		3,818			2,634
Income tax effect related to items of other comprehensive income		(1,361	)		(729	)
Other comprehensive income, after tax		2,457			1,905
Comprehensive income	$	3,823		$	4,520

The accompanying notes are an integral part of the consolidated financial statements.

5 

ENTEGRA FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
Three Months Ended March 31, 2016 and 2015
(Dollars in thousands)

	Common Stock
	Shares			Amount		Additional Paid in Capital			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Common Stock held by Rabbi Trust			Total
Balance, December 31, 2014		6,546,375		$	—	$	63,651		$	45,937	$	(2,269	)	$	—		$	107,319
Net income		—			—		—			2,615		—			—			2,615
Other comprehensive income, net of tax		—			—		—			—		1,905			—			1,905
Balance, March 31, 2015		6,546,375		$	—	$	63,651		$	48,552	$	(364	)	$	—		$	111,839
Balance, December 31, 2015		6,546,375		$	—	$	63,722		$	69,762	$	(1,736	)	$	(279	)	$	131,469
Net income		—			—		—			1,366		—			—			1,366
Other comprehensive income, net of tax		—			—		—			—		2,457			—			2,457
Stock compensation expense		—			—		208			—		—			—			208
Repurchase of common stock		(74,003	)				(1,263	)		—		—			—			(1,263	)
Balance, March 31, 2016		6,472,372		$	—	$	62,667		$	71,129	$	721		$	(279	)	$	134,238

The accompanying notes are an integral part of the consolidated financial statements

6 

ENTEGRA FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)

	For the Three Months Ended March 31,
	2016			2015
Cash flows from operating activities:
Net income	$	1,366		$	2,615
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and leasehold amortization		293			251
Security amortization, net		483			400
Trading account income		(74	)		—
Provision for loan losses		—			(1,500	)
Provision for real estate owned		342			113
Amortization of core deposit intangible		21			—
Share-based compensation expense		208			—
Deferred income tax expense		831			330
Net increase (decrease) in deferred loan fees		(150	)		237
Gain on sales of securities available for sale		(269	)		(164	)
Income on bank owned life insurance, net		(107	)		(112	)
Mortgage banking income, net		(140	)		(255	)
Gain on sales of SBA loans		(334	)		(211	)
Net realized (gain) loss on sale of real estate owned		(144	)		(24	)
Loans originated for sale		(2,932	)		(4,703	)
Proceeds from sale of loans originated for sale		6,520			8,698
Net change in operating assets and liabilities:
Interest receivable		(262	)		(219	)
Loan servicing rights		(54	)		(45	)
Other assets		287			(862	)
Postemployment benefits		29			132
Accrued interest payable		37			7
Other liabilities		(22	)		742
Net cash provided by operating activities	$	5,929		$	5,430

The accompanying notes are an integral part of the consolidated financial statements

7 

ENTEGRA FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited), continued
(Dollars in thousands)

	For the Three Months Ended March 31,
	2016			2015
Cash flows from investing activities:
Activity for investment securities:
Purchases	$	(53,998	)	$	(37,550	)
Maturities/calls and principal repayments		15,000			12,132
Sales		34,717			13,197
Net increase in loans		(8,795	)		(216	)
Purchased loans		—			(13,367	)
Proceeds from sale of real estate owned		249			359
Purchase of fixed assets		(144	)		(2,414	)
Purchase of other investments, at cost		(540	)		(740	)
Redemptions of other investments, at cost		—			150
Net cash used in investing activities	$	(13,511	)	$	(28,449	)
Cash flows from financing activities:
Net increase (decrease) in deposits	$	3,667		$	(3,674	)
Net increase in escrow deposits		428			340
Proceeds from FHLB advances		125,000			25,000
Repayment of FHLB advances		(115,000	)		(10,000	)
Repurchase of common stock		(1,263	)		—
Net cash provided by financing activities	$	12,832		$	11,666
Increase (decrease) in cash and cash equivalents		5,250			(11,353	)
Cash and cash equivalents, beginning of period	$	40,650		$	58,982
Cash and cash equivalents, end of period	$	45,900		$	47,629
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and other borrowings	$	1,332		$	1,545
Noncash investing and financing activities:
Real estate acquired in satisfaction of mortgage loans	$	508		$	1,317
Loans originated for disposition of real estate owned		—			422
Purchased loans and investments to be settled		6,373			3,434
Participation loans not qualified for sale accounting		—			2,086

The accompanying notes are an integral part of the consolidated financial statements

8 

ENTEGRA FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

Organization

Entegra Financial Corp. (the “Company”) was incorporated on May 31, 2011 and became the holding company for Entegra Bank (the “Bank”) on September 30, 2014 upon the completion of Macon Bancorp’s merger with and into the Company, pursuant to which Macon Bancorp converted from the mutual to stock form of organization. The Company’s primary operation is its investment in the Bank. The Company also owns 100% of the common stock of Macon Capital Trust I (the “Trust”), a Delaware statutory trust formed in 2003 to facilitate the issuance of trust preferred securities. The Bank is a North Carolina state-chartered savings bank and has a wholly owned subsidiary, Macon Services, Inc., which was inactive as of March 31, 2016. The consolidated 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.

Estimates

The preparation of consolidated financial statements 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.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the 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 may 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 as previously reported.

Basis of Presentation

The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements and should be read in conjunction with our Annual Report on Form 10-K, filed with the SEC on March 15, 2016. In the opinion of management, these interim financial statements present fairly, in all material respects, the Company’s consolidated financial position and results of operations for each of the interim periods presented. Results of operations for interim periods are not necessarily indicative of the results of operations that may be expected for a full year or any future period.

Subsequent Events

Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet including the estimates inherent in the process of preparing financial statements. Unrecognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. The Company has reviewed events occurring through the issuance date of the Consolidated Financial Statements and no subsequent events have occurred requiring accrual or disclosure in these financial statements other than those included in this Quarterly Report on Form 10-Q.

9 

Recent Accounting Standards Updates

In January 2016, the FASB amended the Financial Instruments topic of the Accounting Standards Codification to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will apply the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values will be applied prospectively to equity investments that exist as of the date of adoption of the amendments. The Company does not expect these amendments to have a material effect on its financial statements.

In March 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify the implementation guidance on principal versus agent considerations and address how an entity should assess whether it is the principal or the agent in contracts that include three or more parties. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.

In March 2016, the FASB issued guidance to simplify several aspects of the accounting for share-based payment award transactions including the income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. Additionally, the guidance simplifies two areas specific to entities other than public business entities allowing them to apply a practical expedient to estimate the expected term for all awards with performance or service conditions that have certain characteristics and also allowing them to make a one-time election to switch from measuring all liability-classified awards at fair value to measuring them at intrinsic value. The amendments will be effective for the Company for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The Company does not expect these amendments to have a material effect on its financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

10 

NOTE 2. INVESTMENT SECURITIES

The amortized cost and estimated fair values of securities available for sale as of March 31, 2016 and December 31, 2015 are summarized as follows:

	March 31, 2016
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(Dollars in thousands)
U.S. government agencies	$	18,027	$	231	$	—		$	18,258
Municipal securities		61,924		1,019		(23	)		62,920
Mortgage-backed securities		175,757		1,422		(466	)		176,713
U.S. Treasury securities		1,500		46		—			1,546
Mutual funds		606		6		—			612
	$	257,814	$	2,724	$	(489	)	$	260,049
	December 31, 2015
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(Dollars in thousands)
U.S. government agencies	$	25,633	$	123	$	(36	)	$	25,720
Municipal securities		39,751		311		(204	)		39,858
Mortgage-backed securities		172,327		276		(1,429	)		171,174
U.S. Treasury securities		1,500		10		—			1,510
Mutual funds		602		—		(2	)		600
	$	239,813	$	720	$	(1,671	)	$	238,862

11 

The amortized cost and estimated fair values of securities held to maturity (“HTM”) as of March 31, 2016 and December 31, 2015 are summarized as follows:

	March 31, 2016
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(Dollars in thousands)
U.S. government agencies	$	5,629	$	412	$	—		$	6,041
Municipal securities		12,667		325		(35	)		12,957
Mortgage-backed securities		4,709		18		(3	)		4,724
U.S. Treasury securities		1,001		3		—			1,004
Corporate debt securities		10,029		44		(67	)		10,006
	$	34,035	$	802	$	(105	)	$	34,732

	December 31, 2015
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(Dollars in thousands)
U.S. government agencies	$	15,877	$	645	$	(23	)	$	16,499
Municipal securities		12,428		199		(93	)		12,534
Mortgage-backed securities		4,834		4		(62	)		4,776
U.S. Treasury securities		1,002		—		(7	)		995
Corporate debt securities		7,023		25		(40	)		7,008
	$	41,164	$	873	$	(225	)	$	41,812

Information pertaining to the activity for the three month period ended March 31, 2016 and 2015 of unrealized losses related to HTM securities (before the impact of income taxes) previously recognized in accumulated other comprehensive income (“AOCI”) is summarized below:

	For the Three Months Ended
	March 31,
(Dollars in thousands)	2016			2015
Beginning unrealized loss related to HTM securities previously recognized in AOCI	$	903		$	1,887
Additions for transfers to HTM		—			—
Amortization of unrealized losses on HTM securities previously recognized in AOCI		(431	)		(49	)
Ending unrealized loss related to HTM securities previously recognized in AOCI	$	472		$	1,838

The increase in amortization during the three months ended March 31, 2016 was due to an increase in securites called.

12 

Information pertaining to securities with gross unrealized losses at March 31, 2016 and December 31, 2015, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

	March 31, 2016
	Less Than 12 Months				More Than 12 Months				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Dollars in thousands)
Held to Maturity:
Municipal securities	$	272	$	7	$	2,210	$	28	$	2,482	$	35
Mortgage-backed securities		2,671		3		—		—		2,671		3
Corporate debt securities		5,440		67		—		—		5,440		67
	$	8,383	$	77	$	2,210	$	28	$	10,593	$	105
Available for Sale:
Municipal securities	$	1,464	$	8	$	1,962	$	15	$	3,426	$	23
Mortgage-backed securities		29,662		220		27,791		246		57,453		466
	$	31,126	$	228	$	29,753	$	261	$	60,879	$	489
	December 31, 2015
	Less Than 12 Months				More Than 12 Months				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Dollars in thousands)
Held to Maturity:
U.S. government agencies	$	5,705	$	23	$	—	$	—	$	5,705	$	23
Municipal securities		4,365		93		—		—		4,365		93
Mortgage-backed securities		2,693		62		—		—		2,693		62
U.S. Treasury securities		995		7		—		—		995		7
Corporate debt securities		4,911		40		—		—		4,911		40
	$	18,669	$	225	$	—	$	—	$	18,669	$	225
Available for Sale:
U.S. government agencies	$	13,317	$	36	$	—	$	—	$	13,317	$	36
Municipal securities		18,769		176		947		28		19,716		204
Mortgage-backed securities		102,419		926		20,905		503		123,324		1,429
Mutual funds		600		2		—		—		600		2
	$	135,105	$	1,140	$	21,852	$	531	$	156,957	$	1,671

13 

Information pertaining to the number of securities with unrealized losses is detailed in the table below. The Company believes all unrealized losses as of March 31, 2016 and December 31, 2015 represent temporary impairment. The unrealized losses have resulted from temporary changes in the interest rate market and not as a result of credit deterioration.We do not intend to sell and it is not likely that we will be required to sell any of the securities referenced in the table below before recovery of their amortized cost.

	March 31, 2016
	Less Than 12 Months		More Than 12 Months		Total
Municipal securities		5		7		12
Mortgage-backed securities		16		19		35
Corporate debt securities		10		—		10
		31		26		57
	December 31, 2015
	Less Than 12 Months		More Than 12 Months		Total
U.S. government agencies		13		—		13
Municipal securities		51		2		53
Mortgage-backed securities		71		15		86
U.S. Treasury securities		1		—		1
Corporate debt securities		9		—		9
Mutual funds		1		—		1
		146		17		163

For the three months ended March 31, 2016 and 2015 the Company had proceeds from sales of securities available for sale and their corresponding gross realized gains and losses as detailed below:

	Three Months Ended March 31,
	2016		2015
	(Dollars in thousands)
Gross proceeds	$	34,717	$	13,197
Gross realized gains		287		184
Gross realized losses		18		20

The Company had securities pledged against deposits and borrowings of approximately $83.6 million and $69.6 million at March 31, 2016 and December 31, 2015, respectively.

The amortized cost and estimated fair value of investments in debt securities at March 31, 2016, by contractual maturity, is shown below. Mortgage-backed securities have not been scheduled because expected maturities will differ from contractual maturities when borrowers have the right to prepay the obligations.

14 

	Available for Sale
	Amortized Cost		Fair Value
	(Dollars in thousands)
Less than 1 year	$	1,106	$	1,112
Over 1 year through 5 years		23,463		23,757
After 5 years through 10 years		13,242		13,525
Over 10 years		44,246		44,942
		82,057		83,336
Mortgage-backed securities		175,757		176,713
Total	$	257,814	$	260,049
	Held to Maturity
	Amortized Cost		Fair Value
	(Dollars in thousands)
Over 1 year through 5 years	$	1,002	$	1,005
After 5 years through 10 years		11,542		11,538
Over 10 years		16,782		17,465
		29,326		30,008
Mortgage-backed securities		4,709		4,724
Total	$	34,035	$	34,732

15 

NOTE 3. LOANS RECEIVABLE

Loans receivable as of March 31, 2016 and December 31, 2015 are summarized as follows:

	March 31, 2016			December 31, 2015
	(Dollars in thousands)
Real estate mortgage loans:
One-to four-family residential	$	251,214		$	248,633
Commercial real estate		224,495			214,413
Home equity loans and lines of credit		51,240			53,446
Residential construction		7,708			7,848
Other construction and land		52,701			57,316
Total real estate loans		587,358			581,656
Commercial and industrial		43,496			41,046
Consumer		4,128			3,639
Total commercial and consumer		47,624			44,685
Loans receivable, gross		634,982			626,341
Less: Net deferred loan fees		(1,238	)		(1,388	)
Unamortized premium		512			557
Unamortized discount		(1,361	)		(1,438	)
Loans receivable, net	$	632,895		$	624,072

The Bank had $123.8 million and $119.5 million of loans pledged as collateral to secure funding with the Federal Home Loan Bank of Atlanta (“FHLB”) at March 31, 2016 and December 31, 2015, respectively. The Bank also had $89.2 million and $88.4 million of loans pledged as collateral to secure funding with the Federal Reserve Bank (“FRB”) Discount Window at March 31, 2016 and December 31, 2015, respectively.

Included in loans receivable and other borrowings at March 31, 2016 are $2.5 million in participated loans that did not qualify for sale accounting. Interest expense on the other borrowings accrues at the same rate as the interest income recognized on the loans receivable, resulting in no effect to net income.

The following tables present the activity related to the discount on purchased loans for the three month periods ended March 31, 2016 and 2015:

	For the Three Months Ended
	March 31,
(Dollars in thousands)	2016			2015
Discount on purchased loans, beginning of period	$	1,438		$	1,487
Additional discount for new purchases		—			492
Accretion		(77	)		(97	)
Discount applied to charge-offs		—			(295	)
Discount on purchased loans, end of period	$	1,361		$	1,587

16 

NOTE 4. ALLOWANCE FOR LOAN LOSSES

The following tables present, by portfolio segment, the changes in the allowance for loan losses:

	Three Months Ended March 31, 2016
	One-to four Family Residential			Commercial Real Estate			Home Equity and Lines of Credit			Residential Construction			Other Construction and Land			Commercial			Consumer			Total
	(Dollars in thousands)
Beginning balance	$	2,455		$	3,221		$	1,097		$	278		$	1,400		$	603		$	407		$	9,461
Provision		293			587			(214	)		(135	)		17			(185	)		(363	)		—
Charge-offs		(46	)		—			(37	)		—			(317	)		—			(10	)		(410	)
Recoveries		23			—			113			—			77			118			116			447
Ending balance	$	2,725		$	3,808		$	959		$	143		$	1,177		$	536		$	150		$	9,498
	Three Months Ended March 31, 2015
	One-to four Family Residential			Commercial Real Estate			Home Equity and Lines of Credit			Residential Construction			Other Construction and Land			Commercial			Consumer			Total
	(Dollars in thousands)
Beginning balance	$	2,983		$	2,717		$	1,333		$	510		$	2,936		$	308		$	285		$	11,072
Provision		(100	)		(416	)		(79	)		(206	)		(1,046	)		281			66			(1,500	)
Charge-offs		(219	)		(30	)		(109	)		—			(19	)		—			(13	)		(390	)
Recoveries		109			92			23			—			119			7			79			429
Ending balance	$	2,773		$	2,363		$	1,168		$	304		$	1,990		$	596		$	417		$	9,611

The following tables present, by portfolio segment and reserving methodology, the allocation of the allowance for loan losses and the gross investment in loans:

	March 31, 2016
	One-to four Family Residential		Commercial Real Estate		Home Equity and Lines of Credit		Residential Construction		Other Construction and Land		Commercial		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses
Individually evaluated for impairment	$	366	$	546	$	6	$	—	$	223	$	35	$	—	$	1,176
Collectively evaluated for impairment		2,359		3,262		953		143		954		501		150		8,322
	$	2,725	$	3,808	$	959	$	143	$	1,177	$	536	$	150	$	9,498
Loans Receivable
Individually evaluated for impairment	$	5,992	$	8,729	$	313	$	—	$	1,970	$	315	$	—	$	17,319
Collectively evaluated for impairment		245,222		215,766		50,927		7,708		50,731		43,181		4,128		617,663
	$	251,214	$	224,495	$	51,240	$	7,708	$	52,701	$	43,496	$	4,128	$	634,982

17 

	December 31, 2015
	One-to four Family Residential		Commercial Real Estate		Home Equity and Lines of Credit		Residential Construction		Other Construction and Land		Commercial		Consumer		Total
	(Dollars in thousands)
Allowance for loan losses
Individually evaluated for impairment	$	344	$	61	$	6	$	—	$	61	$	38	$	—	$	510
Collectively evaluated for impairment		2,111		3,160		1,091		278		1,339		565		407		8,951
	$	2,455	$	3,221	$	1,097	$	278	$	1,400	$	603	$	407	$	9,461
Loans Receivable
Individually evaluated for impairment	$	6,315	$	9,013	$	313	$	—	$	1,509	$	318	$	—	$	17,468
Collectively evaluated for impairment		242,318		205,400		53,133		7,848		55,807		40,728		3,639		608,873
	$	248,633	$	214,413	$	53,446	$	7,848	$	57,316	$	41,046	$	3,639	$	626,341

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. The Company’s internal credit risk grading system is based on experiences with similarly graded loans, industry best practices, and regulatory guidance. Credit risk grades are refreshed each quarter, at which time management analyzes the resulting information, as well as other external statistics and factors, to track loan performance.

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.

● Doubtful (8) – Significant weakness that remains unmitigated and collection in full is highly questionable or improbable.

● Loss (9) – Collectability is unlikely resulting in immediate charge-off.

Beginning as of March 31, 2015, we no longer risk grade consumer purposed loans within all categories for which the individual loan balance is less than $417,000. These loan types provide limited credit information subsequent to origination and therefore may not be properly risk graded within our standard risk grading system. All of our consumer purposed loans are now considered ungraded and will be analyzed on a performing versus non-performing basis. The non-performing ungraded loans will be deemed substandard when determining our classified assets. Consumer purposed loans may include residential loans, home equity loans and lines of credit, residential lot loans, and other consumer loans. This change in risk grading methodology did not have any material impact on our allowance for loan losses calculation.

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 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.

18 

One-to four family residential

We centrally underwrite each of our one-to four family residential loans using credit scoring and analytical tools consistent with the Board-approved lending policy and internal procedures based upon industry best practices and regulatory directives. Loans to be sold to secondary market investors must also adhere to investor guidelines. We also evaluate the value and marketability of that collateral. Common risks to each class of non-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, particularly unemployment and potential declines in real estate values. Personal events such as death, disability or change in marital status also add risk to non-commercial loans.

Commercial real estate

Commercial mortgage 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 secured by real property and 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.

Home equity and lines of credit

Home equity loans are often secured by first or 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.

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.

19 

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.

The following tables present the recorded investment in gross loans by loan grade:

March 31, 2016
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
(Dollars in thousands)
1	$	—	$	64	$	—	$	—	$	—	$	10,199	$	—	$	10,263
2		—		4,408		—		—		—		1,846		—		6,254
3		26,879		12,284		1,267		—		1,039		1,891		—		43,360
4		47,814		90,448		2,200		3,303		7,542		19,085		—		170,392
5		27,678		86,925		4,589		942		26,370		9,635		335		156,474
6		2,938		14,011		466		1,141		1,961		273		—		20,790
7		3,218		14,742		—		—		575		463		—		18,998
	$	108,527	$	222,882	$	8,522	$	5,386	$	37,487	$	43,392	$	335	$	426,531
Ungraded Loan Exposure:
Performing	$	141,207	$	1,613	$	42,502	$	2,322	$	15,214	$	104	$	3,793	$	206,755
Nonperforming		1,480		—		216		—		—		—		—		1,696
Subtotal	$	142,687	$	1,613	$	42,718	$	2,322	$	15,214	$	104	$	3,793	$	208,451
Total	$	251,214	$	224,495	$	51,240	$	7,708	$	52,701	$	43,496	$	4,128	$	634,982

20 

December 31, 2015
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
(Dollars in thousands)
1	$	—	$	65	$	—	$	—	$	—	$	10,336	$	—	$	10,401
2		—		4,446		—		—		—		99		—		4,545
3		18,518		11,396		1,358		525		1,479		1,734		—		35,010
4		46,942		74,542		1,961		2,036		13,850		18,586		1		157,918
5		33,886		97,469		6,648		1,347		22,864		9,274		592		172,080
6		2,903		13,171		—		1,106		1,718		297		—		19,195
7		3,335		13,106		—		—		579		458		—		17,478
	$	105,584	$	214,195	$	9,967	$	5,014	$	40,490	$	40,784	$	593	$	416,627
Ungraded Loan Exposure:
Performing	$	141,771	$	218	$	43,158	$	2,834	$	16,707	$	262	$	3,046	$	207,996
Nonperforming		1,278		—		321		—		119		—		—		1,718
Subtotal	$	143,049	$	218	$	43,479	$	2,834	$	16,826	$	262	$	3,046	$	209,714
Total	$	248,633	$	214,413	$	53,446	$	7,848	$	57,316	$	41,046	$	3,639	$	626,341

21 

Delinquency Analysis of Loans by Class

The following tables include an aging analysis of the recorded investment of past-due financing receivables by class. The Company does not accrue interest on loans greater than 90 days past due.

	March 31, 2016
	30-59 Days Past Due		60-89 Days Past Due		90 Days and Over Past Due		Total Past Due		Current		Total Loans Receivable
	(Dollars in thousands)
One-to four-family residential	$	3,166	$	1,272	$	1,178	$	5,616	$	245,598	$	251,214
Commercial real estate		2,232		1,027		2,300		5,559		218,936		224,495
Home equity and lines of credit		671		134		216		1,021		50,219		51,240
Residential construction		—		—		—		—		7,708		7,708
Other construction and land		528		25		227		780		51,921		52,701
Commercial		—		—		10		10		43,486		43,496
Consumer		15		1		—		16		4,112		4,128
Total	$	6,612	$	2,459	$	3,931	$	13,002	$	621,980	$	634,982
	December 31, 2015
	30-59 Days Past Due		60-89 Days Past Due		90 Days and Over Past Due		Total Past Due		Current		Total Loans Receivable
	(Dollars in thousands)
One-to four-family residential	$	5,610	$	1,260	$	1,205	$	8,075	$	240,558	$	248,633
Commercial real estate		1,585		—		605		2,190		212,223		214,413
Home equity and lines of credit		369		38		322		729		52,717		53,446
Residential construction		—		—		—		—		7,848		7,848
Other construction and land		208		397		138		743		56,573		57,316
Commercial		625		—		—		625		40,421		41,046
Consumer		12		4		—		16		3,623		3,639
Total	$	8,409	$	1,699	$	2,270	$	12,378	$	613,963	$	626,341

22 

Impaired Loans

The following table presents investments in loans considered to be impaired and related information on those impaired loans as of March 31, 2016 and December 31, 2015.

	March 31, 2016						December 31, 2015
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Recorded Balance		Unpaid Principal Balance		Specific Allowance
	(Dollars in thousands)
Loans without a valuation allowance
One-to four-family residential	$	3,818	$	3,844	$	—	$	4,289	$	4,403	$	—
Commercial real estate		5,808		7,174		—		7,226		8,809		—
Home equity and lines of credit		213		328		—		213		328		—
Residential construction		—		—		—		—		—		—
Other construction and land		794		876		—		658		818		—
Commercial		—		—		—		—		—		—
	$	10,633	$	12,222	$	—	$	12,386	$	14,358	$	—
Loans with a valuation allowance
One-to four-family residential	$	2,174	$	2,174	$	366	$	2,026	$	2,026	$	344
Commercial real estate		2,921		3,139		546		1,787		1,787		61
Home equity and lines of credit		100		100		6		100		100		6
Residential construction		—		—		—		—		—		—
Other construction and land		1,176		1,254		223		851		851		61
Commercial		315		314		35		318		318		38
	$	6,686	$	6,981	$	1,176	$	5,082	$	5,082	$	510
Total
One-to four-family residential	$	5,992	$	6,018	$	366	$	6,315	$	6,429	$	344
Commercial real estate		8,729		10,313		546		9,013		10,596		61
Home equity and lines of credit		313		428		6		313		428		6
Residential construction		—		—		—		—		—		—
Other construction and land		1,970		2,130		223		1,509		1,669		61
Commercial		315		314		35		318		318		38
	$	17,319	$	19,203	$	1,176	$	17,468	$	19,440	$	510

23 

The following table presents average impaired loans and interest income recognized on those impaired loans, by class segment, for the periods indicated:

	Three Months Ended March 31,
	2016				2015
	Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized
	(Dollars in thousands)
Loans without a valuation allowance
One-to four-family residential	$	3,832	$	36	$	5,672	$	51
Commercial real estate		5,811		46		12,953		120
Home equity and lines of credit		213		2		714		2
Residential construction		—		—		—		—
Other construction and land		797		8		925		7
Commercial		—				—		—
	$	10,653	$	92	$	20,264	$	180
Loans with a valuation allowance
One-to four-family residential	$	2,182	$	24	$	3,185	$	27
Commercial real estate		2,927		27		3,640		39
Home equity and lines of credit		100		1		186		1
Residential construction		—		—		—		—
Other construction and land		1,180		10		1,020		10
Commercial		316		5		328		5
	$	6,705	$	67	$	8,359	$	82
Total
One-to four-family residential	$	6,014	$	60	$	8,857	$	78
Commercial real estate		8,738		73		16,593		159
Home equity and lines of credit		313		3		900		3
Residential construction		—		—		—		—
Other construction and land		1,977		18		1,945		17
Commercial		316		5		328		5
	$	17,358	$	159	$	28,623	$	262

Nonperforming Loans

The following table summarizes the balances of nonperforming loans as of March 31, 2016 and December 31, 2015. Certain loans classified as Troubled Debt Restructurings (“TDRs”) and impaired loans may be on non-accrual status even though they are not contractually delinquent.

	March 31, 2016		December 31, 2015
	(Dollars in thousands)
One-to four-family residential	$	2,983	$	2,893
Commercial real estate		5,253		3,628
Home equity loans and lines of credit		214		320
Residential construction		—		—
Other construction and land		470		384
Commercial		62		55
Consumer		—		—
Non-performing loans	$	8,982	$	7,280

24 

Troubled Debt Restructurings (TDR)

The following tables summarize TDR loans as of the dates indicated:

	March 31, 2016
	Performing		Nonperforming		Total
	TDR’s		TDR’s		TDR’s
	(Dollars in thousands)
One-to-four family residential	$	3,675	$	211	$	3,886
Commercial real estate		4,853		2,922		7,775
Home equity and lines of credit		213		—		213
Residential construction		—		—		—
Other construction and land		1,510		250		1,760
Commercial		314		11		325
	$	10,565	$	3,394	$	13,959
	December 31, 2015
	Performing		Nonperforming		Total
	TDR’s		TDR’s		TDR’s
	(Dollars in thousands)
One-to-four family residential	$	4,182	$	211	$	4,393
Commercial real estate		5,134		2,922		8,056
Home equity and lines of credit		313		—		313
Residential construction		—		—		—
Other construction and land		1,259		250		1,509
Commercial		318		12		330
	$	11,206	$	3,395	$	14,601

25 

Loan modifications that were deemed TDRs at the time of the modification during the period presented are summarized in the tables below:

	Three Months Ended March 31, 2016
(Dollars in thousands)	Number of Loans		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment
None		—	$	—	$	—
		—	$	—	$	—
	Three Months Ended March 31, 2015
(Dollars in thousands)	Number of Loans		Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment
Forgiveness of principal:
Commercial real estate		1		1,988		1,693
		1	$	1,988	$	1,693

There were no TDR’s that defaulted during the three month periods ending March 31, 2016 and 2015 and which were modified as TDR’s within the previous 12 months.

26 

NOTE 5. REAL ESTATE OWNED

The following tables summarize real estate owned and changes in the valuation allowance for real estate owned as of March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015.

	March 31,		December 31,
(Dollars in thousands)	2016		2015
Real estate owned, gross	$	7,081	$	6,741
Less:  Valuation allowance		1,651		1,372
Real estate owned, net	$	5,430	$	5,369

	Three Months Ended March 31,
(Dollars in thousands)	2016			2015
Valuation allowance, beginning	$	1,372		$	1,760
Provision charged to expense		342			68
Reduction due to disposal		(63	)		(222	)
Valuation allowance, ending	$	1,651		$	1,606

As of March 31, 2016 and December 31, 2015, the Company had $1.2 million and $0.7 million, respectively, in loans secured by residential real estate properties for which formal foreclosure proceedings were in process. As of March 31, 2016 and December 31, 2015, the Company had $1.8 million and $1.4 million, respectively, of residential real estate properties included in real estate owned.

NOTE 6. DEPOSITS

The following table summarizes deposit balances and interest expense by type of deposit as of and for the three months ended March 31, 2016 and 2015 and the year ended December 31, 2015.

	As of and for the								As of and for the Year Ended
	Three Months Ended March 31,								December 31,
	2016				2015				2015
(Dollars in thousands)	Balance		Interest Expense		Balance		Interest Expense		Balance		Interest Expense
Noninterest-bearing demand	$	118,228	$	—	$	89,012	$	—	$	121,062	$	—
Interest-bearing demand		105,374		27		89,845		36		103,198		136
Money Market		193,775		148		175,162		154		180,377		558
Savings		35,915		10		28,278		8		35,838		33
Time Deposits		267,420		757		317,486		1,011		276,142		3,607
	$	720,712	$	942	$	699,783	$	1,209	$	716,617	$	4,334

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NOTE 7. BORROWINGS

The scheduled maturities and respective weighted average rates of outstanding FHLB advances, are as follows for the dates indicated:

	March 31, 2016					December 31, 2015
Year of Maturity	Balance		Weighted Average Rate			Balance		Weighted Average Rate
	(Dollars in thousands)
2016		135,000		0.60	%		130,000		0.49	%
2017		13,000		1.06	%		8,000		1.23	%
2018		2,000		1.25	%		2,000		1.25	%
2019		12,500		1.82	%		12,500		1.82	%
2020		1,000		1.78	%		1,000		1.78	%
	$	163,500		0.75	%	$	153,500		0.65	%

NOTE 8. INCOME TAXES

During 2015, the Company completed an analysis of all positive and negative evidence in assessing the need to maintain the valuation allowance against its net deferred tax asset. As a result of this analysis, the Company determined that significant positive evidence existed that would support the reversal of the valuation allowance including the following:

● A pattern of sustained profitability, excluding non-recurring items, since the first quarter of 2014;

● A 3 year cumulative profit;

● Forecasted earnings sufficient to utilize all remaining net operating losses prior to expiration beginning in 2025 for North Carolina and 2032 for Federal ;

● Significant improvements in asset quality;

● Resolution of all remaining regulatory orders; and

● A strong capital position enabling future earnings investments.

As of March 31, 2016 and December 31, 2015, $0.4 million and $0.6 million in valuation allowance related to net deferred tax assets on investment securities remains in accumulated other comprehensive income. This valuation allowance will be recognized as tax expense on a security-by-security basis upon the sale or maturity of the individual securities. The tax expense is expected to be recognized over the remaining life of the securities of approximately 2.5 years.

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The components of net deferred taxes as of March 31, 2016 and December 31, 2015 are summarized as follows:

	March 31,		December 31,
	2016		2015
	(Dollars in thousands)
Deferred tax assets:
Federal net operating loss	$	10,169	$	10,750
Allowance for loan losses		3,571		3,557
Deferred compensation and post employment benefits		3,492		3,498
North Carolina net operating loss		921		988
Valuation reserve for other real estate		621		516
Non-accrual interest		312		286
Deferred gains		192		154
Unrealized losses on securities		—		697
Other		639		618
Gross deferred tax assets		19,917		21,064
Deferred tax liabilities:
Fixed assets		510		499
Loan servicing rights		902		881
Deferred loan costs		820		708
Prepaid expenses		161		146
Unrealized gains on securities		664		—
Other		21		—
Total deferred tax liabilities		3,078		2,234
Net deferred tax asset	$	16,839	$	18,830

NOTE 9. EARNINGS PER SHARE

The following is a reconciliation of the numerator and denominator of basic and diluted net income per share of common stock:

(Dollars in thousands, except per share amounts)	For the Three Months Ended March 31, 2016		For the Three Months Ended March 31, 2015
Numerator:
Net income	$	1,366	$	2,615
Denominator:
Weighted-average common shares outstanding - basic		6,517,753		6,546,375
Effect of dilutive shares		202		—
Weighted-average common shares outstanding - diluted		6,517,955		6,546,375
Earnings per share - basic	$	0.21	$	0.40
Earnings per share - diluted	$	0.21	$	0.40

For the three months ended March 31, 2016, all of the 371,000 outstanding stock options remain anti-dilutive and have not been included in calculating diluted earnings per share. There were no stock options outstanding during the three months ended March 31, 2015.

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For the three months ended March 31, 2016, 157,100 of the 160,300 outstanding restricted stock units remain anti-dilutive and have not been included in calculating diluted earnings per share. There were no restricted stock units outstanding during the three months ended March 31, 2015.

NOTE 10. ACCUMLATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table summarizes the components of accumulated other comprehensive income and changes in those components as of and for the three months ended March 31, 2016 and 2015.

	Three Months Ended March 31, 2016
	Available for Sale Securities			Held to Maturity Securities Transferred from AFS			Deferred Tax Valuation Allowance on AFS			Total
	(Dollars in thousands)
Balance, beginning of period	$	(594	)	$	(563	)	$	(579	)	$	(1,736	)
Change in deferred tax valuation allowance attributable to net unrealized losses on investment securities available for sale		—			—			201			201
Change in net unrealized holding losses on securities available for sale		3,455			—			—			3,455
Reclassification adjustment for net securities gains realized in net income		(269	)		—			—			(269	)
Transfer of net unrealized loss from available for sale to held to maturity		—			—			—			—
Amortization of unrealized gains and losses on securities transferred to held to maturity		—			431			—			431
Income tax benefit		(1,198	)		(163	)		—			(1,361	)
Balance, end of period	$	1,394		$	(295	)	$	(378	)	$	721
	Three Months Ended March 31, 2015
	(Dollars in thousands)
Balance, beginning of period	$	(236	)	$	(1,165	)	$	(868	)	$	(2,269	)
Change in deferred tax valuation allowance attributable to unrealized gains on investment securities available for sale		—			—			729			729
Change in unrealized holding gains on securities available for sale		2,020			—			—			2,020
Reclassification adjustment for net securities gains realized in net income		(164	)		—			—			(164	)
Transfer of net unrealized loss from available for sale to held to maturity		—			—			—			—
Amortization of unrealized gains and losses on securities transferred to held to maturity		—			49			—			49
Income tax benefit		(710	)		(19	)		—			(729	)
Balance, end of period	$	910		$	(1,135	)	$	(139	)	$	(364	)

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The following table shows the line items in the Consolidated Statements of Income affected by amounts reclassified from accumulated other comprehensive income:

	Three Months Ended March 31,
	2016		2015
	(Dollars in thousands)
Income tax expense	$	201	$	—
Tax effect		—		—
Impact, net of tax		201		—
Gain on sale of investments, net	$	269	$	164
Tax effect		—		—
Impact, net of tax		269		164
Interest income - taxable securities		431		49
Tax effect		—		—
Impact, net of tax		431		49
Total reclassifications, net of tax	$	901	$	213

NOTE 11. 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 extend credit:

	March 31, 2016
	(Dollars in thousands)
Lines of credit	$	83,540
Standby letters of credit		777
	$	84,317

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As of March 31, 2016, the Company had outstanding commitments to originate loans as follows:

	March 31, 2016
	Amount		Range of Rates
	(Dollar in thousands)
Fixed	$	20,079	2.14% to 5.00%
Variable		17,670	3.25% to 6.25%
	$	37,749

The allowance for unfunded commitments was $0.1 million at March 31, 2016 and December 31, 2015.

The Company is exposed to loss as a result of its obligation for representations and warranties on loans sold to Fannie Mae and maintained a reserve of $0.3 million as of March 31, 2016 and December 31, 2015.

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 is expected to have a material adverse effect on the accompanying consolidated financial statements.

NOTE 12. FAIR VALUE DISCLOSURES

We use fair value measurements when recording and disclosing certain financial assets and liabilities. Securities available-for-sale, loan servicing rights and mortgage derivatives are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record other assets at fair value on a nonrecurring basis, such as loans held for sale, impaired loans and real estate owned.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants at the measurement date. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction. In determining fair value, we use various valuation approaches, including market, income and cost approaches. The fair value standard establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use 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 liability, which is developed, based on market data we have obtained from independent sources. Unobservable inputs reflect our estimate of assumptions that market participants would use in pricing an asset or liability, which are developed based on the best information available in the circumstances.

The fair value 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 inputs as follows:

● Level 1: valuation is based upon unadjusted quoted market prices for identical instruments traded in active markets.

● Level 2: valuation is based upon quoted market prices for similar instruments traded in active markets, quoted market prices for identical or similar instruments traded in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by market data.

● Level 3: valuation is derived from other valuation methodologies, including discounted cash flow models and similar techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in determining fair value.

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A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value 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.

Following is a description of valuation methodologies used for assets and liabilities 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 methodologies include broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.

Included in securities are investments in an exchange traded bond fund and U.S. Treasury bonds which are valued by reference to quoted market prices and considered a Level 1 security.

Trading securites represent investments in exchange traded mutual funds which are valued by reference to quoted market prices and considered a Level 1 security.

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 rights 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 collateral dependent impaired loans is estimated using the value of the collateral less selling costs if repayment is expected from liquidation of the collateral. 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. Impaired loans measured using the present value of expected future cash flows are not deemed to be measured at fair value.

33

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. 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 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.

Other Investments, at cost

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 equal to the amounts payable on demand at the reporting date. 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 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 LIBOR.

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 be a reasonable estimate of fair value.

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Loan Commitments

Estimates of the fair value of these off-balance sheet items are not made because of the short-term nature of these arrangements and the credit standing of the counterparties.

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:

	March 31, 2016
	Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Trading account assets — mutual funds	$	4,841	$	—	$	—	$	4,841
Securities available for sale:
U.S. government agencies		—		18,258		—		18,258
Municipal securities		—		62,920		—		62,920
Mortgage-backed securities		—		176,713		—		176,713
U.S. Treasury securities		1,546		—		—		1,546
Mutual funds		612		—		—		612
		6,999		257,891		—		264,890
Loan servicing rights		—		—		2,398		2,398
Forward sales commitments		—		—		15		15
Interest rate lock commitments		—		—		65		65
Total assets	$	6,999	$	257,891	$	2,478	$	267,368

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	December 31, 2015
	Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Trading account assets	$	4,714	$	—	$	—	$	4,714
Securities available for sale:
U.S. government agencies		—		25,720		—		25,720
Municipal securities		—		39,858		—		39,858
Mortgage-backed securities		—		171,174		—		171,174
U.S. Treasury securities		1,510		—		—		1,510
Mutual funds		600		—		—		600
		6,824		236,752		—		243,576
Loan servicing rights		—		—		2,344		2,344
Forward sales commitments		—		—		16		16
Interest rate lock commitments		—		—		30		30
Total assets	$	6,824	$	236,752	$	2,390	$	245,966

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:

	Three Months Ended March 31,
	2016			2015
	(Dollars in thousands)
Balance at beginning of period	$	2,390		$	2,248
Loan servicing right activity, included in servicing income, net
Capitalization from loans sold		128			133
Fair value adjustment		(74	)		(88	)
Mortgage derivative gains included in Other income		34			75
Balance at end of period	$	2,478		$	2,368

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The table below presents information about certain assets and liabilities measured at fair value on a nonrecurring basis. There were no loans held for sale carried at fair value at either March 31, 2016 or December 31, 2015.

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	March 31, 2016
	Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Collateral dependent impaired loans:
One-to four family residential	$	—	$	—	$	3,858	$	3,858
Commercial real estate		—		—		6,956		6,956
Home equity loans and lines of credit		—		—		213		213
Other construction and land		—		—		1,127		1,127
Real estate owned:
One-to four family residential		—		—		1,795		1,795
Commercial real estate		—		—		1,097		1,097
Other construction and land		—		—		2,538		2,538
Total assets	$	—	$	—	$	17,584	$	17,584

	December 31, 2015
	Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Collateral dependent impaired loans:
One-to four family residential	$	—	$	—	$	4,163	$	4,163
Commercial real estate		—		—		7,226		7,226
Home equity loans and lines of credit		—		—		213		213
Other construction and land		—		—		658		658
Real estate owned:
One-to four family residential		—		—		1,384		1,384
Commercial real estate		—		—		1,123		1,123
Other construction and land		—		—		2,862		2,862
Total assets	$	—	$	—	$	17,629	$	17,629

There were no liabilities measured at fair value on a nonrecurring basis as of March 31, 2016 or December 31, 2015.

Impaired loans totaling $5.2 million at March 31, 2016 and December 31, 2015, were measured using the present value of expected future cash flows. These impaired loans were not deemed to be measured at fair value on a nonrecurring basis.

The following table provides information describing the unobservable inputs used in Level 3 fair value measurements at March 31, 2016.

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	Valuation Technique	Unobservable Input	General Range
Impaired loans	Discounted Appraisals	Collateral discounts and estimated selling cost	0 – 30%
Real estate owned	Discounted Appraisals	Collateral discounts and estimated selling cost	0 – 30%
Loan servicing rights	Discounted Cash Flows	Prepayment speed	5 - 35%
		Discount rate	12% - 14%
Forward sales commitments and interest rate lock commitments	Change in market price of underlying loan	Value of underlying loan	101 - 108%

The approximate carrying and estimated fair value of financial instruments are summarized below:

			Fair Value Measurements at March 31, 2016
	Carrying
(Dollars in thousands)	Amount		Total		Level 1		Level 2		Level 3
Assets:
Cash and equivalents	$	45,900	$	45,900	$	45,900	$	—	$	—
Trading securities		4,841		4,841		4,841		—		—
Securities available for sale		260,049		260,049		2,158		257,891		—
Securities held to maturity		34,035		34,732		1,004		33,728		—
Loans held for sale		5,182		5,609		—		5,609		—
Loans receivable, net		632,895		629,223		—		—		629,223
Other investments, at cost		9,374		9,374		—		9,374		—
Interest receivable		3,816		3,816		—		3,816		—
Bank owned life  insurance		20,964		20,964		—		20,964		—
Loan servicing rights		2,398		2,398		—		—		2,398
Forward sales commitments		15		15		—		—		15
Interest rate lock commitments		65		65		—		—		65
Liabilities:
Demand deposits	$	453,292		453,292	$	—	$	453,292	$	—
Time deposits		267,420		267,766		—		—		267,766
Federal Home Loan Bank advances		163,500		163,682		—		163,682		—
Junior subordinated debentures		14,433		14,433		—		14,433		—
Accrued interest payable		250		250		—		250		—

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			Fair Value Measurements at December 31, 2015
	Carrying
(Dollars in thousands)	Amount		Total		Level 1		Level 2		Level 3
Assets:
Cash and equivalents	$	40,650	$	40,650	$	40,650	$	—	$	—
Trading securities		4,714		4,714		4,714		—		—
Securities available for sale		238,862		238,862		2,110		236,752		—
Securities held to maturity		41,164		41,812		995		40,817		—
Loans held for sale		8,348		8,952		—		8,952		—
Loans receivable, net		624,072		620,516		—		—		620,516
Other investments, at cost		8,834		8,834		—		8,834		—
Interest receivable		3,554		3,554		—		3,554		—
Bank owned life  insurance		20,858		20,858		—		20,858		—
Loan servicing rights		2,344		2,344		—		—		2,344
Forward sales commitments		16		16		—		—		16
Interest rate lock commitments		30		30		—		—		30
Liabilities:
Demand deposits	$	440,475		440,475	$	—	$	440,475	$	—
Time deposits		276,142		275,403		—		—		275,403
Federal Home Loan Bank advances		153,500		153,441		—		153,441		—
Junior subordinated debentures		14,433		14,433		—		14,433		—
Accrued interest payable		213		213		—		213		—

NOTE 13. SHARE REPURCHASES

On January 28, 2016, the Company announced that the Board of Directors had authorized the repurchase of up to 327,318 shares of the Company’s common stock. The authorization represented approximately 5% of the Company’s shares outstanding as of December 31, 2015.

The following table summarizes share repurchase activity through March 31, 2016:

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1, 2016 to January 31, 2016		—	$	—		—		—
February 1, 2016 to February 29, 2016		40,621	$	17.04		40,621		286,697
March 1, 2016 to March 31, 2016		33,382	$	17.10		33,382		253,315
Total year-to-date 2016		74,003	$	17.07		74,003		253,315

NOTE 14. SUBSEQUENT EVENTS

On April 1, 2016, the Company completed its acquisition of Oldtown Bank (“Oldtown”) of Waynesville, North Carolina, which was merged with and into Entegra Bank. The Company will continue to operate Oldtown’s office under the Oldtown name until a system conversion is completed in August 2016.

Shareholders of Oldtown received a cash payment equal to $11.05 in exchange for each share of Oldtown common stock held immediately prior to the effective time of the merger. The aggregate merger consideration paid by the Company was approximately $13.5 million, which included a $0.7 million payment for the cash-out of in-the-money stock options. The Company did not issue any shares of its common stock in connection with the merger.

The acquisition added approximately $97.9 million to the Company’s assets, including $64.6 million of loans and $88.7 million of deposits.

39

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q 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. The Company is under no duty to and do not undertake any obligation to update any forward-looking statements after the date of this Quarterly Report on Form 10-Q.

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:

• the occurrence of an ownership change under applicable tax rules that could limit our ability to utilize losses to offset future taxable income;

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

• credit quality deterioration as a result of, among other potential factors, declining real estate values, increasing interest rates, increasing unemployment, or changes in payment behavior or other factors;

• the adequacy of the level of our allowance for loan losses and the amount of loan loss provisions required in future periods;

• weaknesses in the real estate market affect the value of real estate serving as collateral for loans in our portfolio

• 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;

• increased cybersecurity risk, including potential business disruptions or financial losses;

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

• our ability to successfully integrate acquired entities;

• changes in consumer spending, borrowing and savings habits;

• changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board (“FASB”), the Securities and Exchange Commission (“SEC”) and the Public Company Accounting Oversight Board (“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 or buyback shares;

• changes in the financial condition or future prospects of issuers of securities that we own; and

• other risks and uncertainties detailed in this Quarterly Report on Form 10-Q and, from time to time, in our other filings with the SEC.

For additional information with respect to factors that could cause actual results to differ from the expectations stated in the forward-looking statements, see “Risk Factors” under Part I, Item 1A of our Annual Report on Form 10-K.

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Critical Accounting Policies and Estimates

Our critical accounting policies involving significant judgments and assumptions used in the preparation of the Consolidated Financial Statements as of March 31, 2016 have remained unchanged from the disclosures presented in our Annual Report on Form 10-K.

The Jumpstart Our Business Startups Act (“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 March 31, 2016 and December 31, 2015, there was not a significant difference in the presentation of our financial statements as compared to other public companies as a result of this transition guidance.

Overview

Entegra Financial Corp. was incorporated on May 31, 2011 to be the holding company for Entegra Bank (the “Bank”) upon the completion of Macon Bancorp’s merger with and into Entegra Financial Corp., pursuant to which Macon Bancorp converted from the mutual to stock form of organization. Prior to the completion of the conversion, Entegra Financial Corp. did not engage in any significant activities other than organizational activities. On September 30, 2014, the mutual to stock conversion was completed and the Bank became the wholly owned subsidiary of Entegra Financial Corp. Also on September 30, 2014, Entegra Financial Corp. completed the initial public offering of its common stock. In this Discussion and Analysis section, terms such as “we,” “us,” “our” and the “Company” refer to Entegra Financial Corp.

We provide a full range of financial services through offices located in Cherokee, Henderson, Jackson, Macon, Polk, Haywood and Transylvania counties in North Carolina and Anderson, Greenville, and Spartanburg counties in South Carolina. We provide full service retail and commercial banking products as well as wealth management services through a third party.

We earn revenue primarily from interest on loans and securities, and fees charged for financial services provided to our customers. Offsetting these revenues are the cost of deposits and other funding sources, provisions for loan losses and other operating costs such as salaries and employee benefits, data processing, occupancy and tax expense.

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.

Recent Events

On April 1, 2016, the Company completed its acquisition of Oldtown Bank (“Oldtown”) of Waynesville, North Carolina, which was merged with and into Entegra Bank. The Company will continue to operate Oldtown’s office under the Oldtown name until a system conversion is completed in August 2016.

Shareholders of Oldtown received a cash payment equal to $11.05 in exchange for each share of Oldtown common stock held immediately prior to the effective time of the merger. The aggregate merger consideration paid by the Company was approximately $13.5 million, which included a $0.7 million payment for the cash-out of in-the-money stock options. The Company did not issue any shares of its common stock in connection with the merger.

The acquisition added approximately $97.9 million to the Company’s assets, including $64.6 million of loans and $88.7 million of deposits.

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Strategic Plan

We continue to execute on our Board of Director approved strategic plan which involves the following key components:

● Positioning the Company for long-term independence by building a franchise that will provide above average shareholder returns;

● Seeking acquisition opportunities that have reasonable earn-back periods and are accretive to return on equity while minimizing book value dilution;

● Building long term franchise value by diversifying into high growth markets with geographic contiguity to our current markets;

● Maximizing our capital leverage through organic and acquired asset growth; and

● Rational use of share repurchases to supplement shareholder returns and return excess capital to shareholders, but not at the expense of building long-term value.

The following discussion and analysis is presented on a consolidated basis and focuses on the major components of the Company’s operations and significant changes in its results of operations for the periods presented. We encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information included in this report and in our Annual Report on Form 10-K.

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Earnings Summary

Net income for the three months ended March 31, 2016 was $1.4 million compared to $2.6 million for the same period in 2015. The decrease in net income for the quarter was primarily the result of a negative provision of $1.5 million during the 2015 period and increases in noninterest expense of $0.7 million and income tax expense of $0.7 million during the 2016 period. These changes were partially offset by a $1.3 million increase in net interest income and an increase of $0.3 million in noninterest income during the 2016 period.

Net interest income increased $1.3 million, or 20.4%, to $7.6 million for the three months ended March 31, 2016 compared to the same period in 2015. The increase in net interest income for the period was primarily the result of increases in interest and fee income on loans of $0.7 million and interest on taxable securities of $0.2 million along with a decrease in interest expense on deposits of $0.2 million.

Due to continued improvement in asset quality and significantly reduced charge-off amounts, no provision for loan losses was needed during the three months ended March 31, 2016 and a negative provision for loan losses of $1.5 million was recognized for the three months ended March 31, 2015.

Non-GAAP Financial Measures

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

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We analyze our net interest income, noninterest expense, and net income on a non-GAAP basis in order to exclude non-recurring items as detailed in the table below:

	Three Months Ended March 31,
	2016			2015
	(Dollars in thousands)
Core Noninterest Expense
Noninterest expense (GAAP)	$	7,279		$	6,576
Merger-related expenses		(145	)		—
Core noninterest expense (Non-GAAP)	$	7,134		$	6,576
Core Net Income
Net income (GAAP)	$	1,366		$	2,615
Negative provision for loan losses		—			(1,500	)
Merger-related expenses		145			—
Adjust actual income tax expense to 35% estimated effective tax rate (1)		—			(273	)
Core net income (Non-GAAP)	$	1,511		$	842
Core Earnings Per Share
Earnings per share (GAAP)	$	0.21		$	0.40
Negative provision for loan losses		—			(0.23	)
Merger-related expenses		0.02			—
Adjust actual income tax expense to 35% estimated effective tax rate (1)		—			(0.04	)
Core earnings per share (Non-GAAP)	$	0.23		$	0.13
Core Return on Average Assets
Return on Average Assets (GAAP)		0.53	%		1.18	%
Negative provision for loan losses		—			-0.67	%
Merger-related expenses		0.06	%		—
Adjust actual income tax expense to 35% estimated effective tax rate (1)		—			-0.12	%
Core Return on Average Assets (Non-GAAP)		0.58	%		0.39	%
Core Return on Average Equity
Return on Average Equity (GAAP)		4.10	%		9.69	%
Negative provision for loan losses		—			-5.44	%
Merger-related expenses		0.44	%		—
Adjust actual income tax expense to 35% estimated effective tax rate (1)		—			-0.99	%
Core Return on Average Equity (Non-GAAP)		4.53	%		3.26	%
Core Efficiency Ratio
Efficiency ratio (GAAP)		76.63	%		83.55	%
Merger-related expenses		-1.53	%		—
Core Efficiency Ratio (Non-GAAP)		75.10	%		83.55	%
	As Of
	March 31, 2016			December 31, 2015
	(Dollars in thousands, except share data)
Tangible Book Value Per Share
Book Value (GAAP)	$	134,238		$	131,469
Goodwill and intangibles		(1,280	)		(1,301	)
Book Value (Tangible)		132,958			130,168
Outstanding shares		6,472,372			6,546,375
Tangible Book Value Per Share	$	20.54		$	19.88

(1) - The Company maintained a valuation allowance on a portion of its net deferred tax asset during a portion of 2015 and therefore did not recognize a normal income tax provision. Core results have been adjusted to reflect income tax expense to an estimated 35% effective tax rate after the other adjustments have been applied.

Financial Condition At March 31, 2016 and December 31, 2015

Total assets increased $23.6 million, or 2.3%, to $1.06 billion at March 31, 2016 from $1.03 billion at December 31, 2015. This increase in assets was comprised primarily of loans, which increased $8.8 million, or 1.4%, and investment securities, which increased $14.2 million, or 5.0%. The increases in loans and investments were funded by deposits which increased $4.1 million, or 0.6%, and FHLB advances which increased $10.0 million.

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Total liabilities increased $20.9 million, or 2.3%, to $920.8 million at March 31, 2016 from $899.9 million at December 31, 2015, due primarily to the $4.1 million increase in deposits and $10.0 million increase in FHLB advances.

Total equity increased $2.8 million, or 2.1%, to $134.2 million at March 31, 2016 from $131.5 million at December 31, 2015. This increase was the result of $1.4 million of net income for the period and a $2.5 million improvement in net unrealized holding gains and losses on securities available for sale.

Cash and Cash Equivalents

Total cash and cash equivalents increased $5.3 million, or 12.9%, to $45.9 million at March 31, 2016 from $40.7 million at December 31, 2015 as a result of general fluctuations in our cash balances.

Investment Securities

During the fourth quarter of 2015, the Company funded a trading account which is held in a Rabbi trust to generate returns that seek to offset changes in liabilities related to the market risk of certain deferred compensation agreements.

The following table presents the holdings of our trading account as of March 31, 2016 and December 31, 2015:

	March 31, 2016		December 31, 2015
	(Dollars in thousands)
Cash	$	—	$	4,714
Mutual funds		4,841		—
	$	4,841	$	4,714

The remainder of 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 March 31,				At December 31,
	2016				2015
	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	$	18,027	$	18,258	$	25,633	$	25,720
U.S. Treasury Notes & Bonds		1,500		1,546		1,500		1,510
Municipal obligations		61,924		62,920		39,751		39,858
Mortgage-backed securities:
U.S. Government agency		107,932		108,749		112,857		112,010
SBA securities		52,399		52,527		47,768		47,582
Collateralized mortgage obligations		15,426		15,437		11,702		11,582
Mutual funds		606		612		602		600
Total securities available-for-sale	$	257,814	$	260,049	$	239,813	$	238,862

Available-for-sale investment securities increased $21.2 million, or 8.9%, to $260.0 million at March 31, 2016 from $238.9 million at December 31, 2015. We continue to grow our investment portfolio as we seek to better leverage our capital.

Held to maturity investment securities are carried at amortized cost. The following table shows the amortized cost and fair value for our held-to-maturity investment portfolio as of the most recent quarter and year end.

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	At March 31,				At December 31,
	2016				2015
	Amortized Cost		Fair value		Amortized Cost		Fair value
	(Dollars in thousands)
Investment securities held-to-maturity:
U.S. Government and agency securities:
U.S. Government and agency obligations	$	1,047	$	1,051	$	5,729	$	5,706
U.S. Government structured agency obligations		4,582		4,990		10,148		10,793
U.S. Treasury Notes & Bonds		1,001		1,004		1,002		995
Municipal tax exempt		7,906		8,163		7,641		7,825
Municipal taxable		4,761		4,794		4,787		4,709
Collateralized mortgage obligations		4,709		4,724		4,834		4,776
Corporate debt securities		10,029		10,006		7,023		7,008
Total securities held-to-maturity	$	34,035	$	34,732	$	41,164	$	41,812

Held-to-maturity investment securities decreased $7.1 million, or 17.3%, to $34.0 million at March 31, 2016 from $41.8 million at December 31, 2015 as a result of several structured agency securities being called during the quarter.

In prior years, the Company reclassified certain municipal securities from available-for-sale to held-to-maturity. The reclassifications will remain in effect until the investments are called or mature. 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 (loss), and will be amortized into income over the remaining life of the securities 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.

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.

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	At March 31,						At December 31,
	2016						2015
	Amount			Percent			Amount			Percent
	(Dollars in thousands)
Real estate loans:
One- to four-family residential	$	251,214			39.6	%	$	248,633			39.7	%
Commercial		224,495			35.3			214,413			34.2
Home equity loans and lines of credit		51,240			8.1			53,446			8.5
Residential construction		7,708			1.2			7,848			1.3
Other construction and land		52,701			8.3			57,316			9.1
Commercial		43,496			6.8			41,046			6.6
Consumer		4,128			0.7			3,639			0.6
Total loans, gross	$	634,982			100.0	%	$	626,341			100.0	%
Less:
Deferred loan fees, net		(1,238	)					(1,388	)
Unamortized premium		512						557
Unamortized discount		(1,361	)					(1,438	)
Total loans, net	$	632,895					$	624,072
Percentage of total assets		60.0	%					60.5	%

Net loans increased $8.8 million, or 1.4%, to $632.9 million at March 31, 2016 from $624.1 million at December 31, 2015. During 2016, we have continued to experience an improvement in loan demand and we maintain a strong pipeline going into the second quarter. We believe that economic conditions in our primary market areas are strong and present opportunities for continued growth. The amount of commercial real estate and commercial loans as a percentage of total loans continues to increase as we continue to shift our lending focus to these loan types as we develop stronger commercial relationships in all of our markets.

Included in loans receivable and other borrowings at March 31, 2016 are $2.5 million in participated loans that did not qualify for sale accounting. Interest expense on the other borrowings accrues at the same rate as the interest income recognized on the loans receivable, resulting in no effect to net income.

Delinquent Loans

When a loan becomes 15 days past due, we contact the borrower to inquire as to why the loan is past due. When a loan becomes 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 Credit Administration staff 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.

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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 as of March 31, 2016 or December 31, 2015.

	Delinquent loans
	30-59 Days			60-89 Days			90 Days and over			Total
	(Dollars in thousands)
At March 31, 2016
Real estate loans:
One- to four-family residential	$	3,166		$	1,272		$	1,178		$	5,616
Commercial		2,232			1,027			2,300			5,559
Home equity loans and lines of credit		671			134			216			1,021
Residential construction		—			—			—			—
Other construction and land		528			25			227			780
Commercial		—			—			10			10
Consumer		15			1			—			16
Total loans	$	6,612		$	2,459		$	3,931		$	13,002
% of total loans, net		1.06	%		0.39	%		0.63	%		2.08	%
At December 31, 2015
Real estate loans:
One- to four-family residential	$	5,610		$	1,260		$	1,205		$	8,075
Commercial		1,585			—			605			2,190
Home equity loans and lines of credit		369			38			322			729
One- to four-family residential construction		—			—			—			—
Other construction and land		208			397			138			743
Commercial		625			—			—			625
Consumer		12			4			—			16
Total loans	$	8,409		$	1,699		$	2,270		$	12,378
% of total loans, net		1.37	%		0.27	%		0.37	%		2.01	%

Delinquent loans increased $0.6 million, or 5.0%, to $13.0 million at March 31, 2016 from $12.4 million at December 31, 2015. Despite the current quarter increase, our level of delinquent loans has improved significantly in recent periods and remains fairly low.

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Non-Performing Assets

Non-performing loans include all loans past due 90 days and over, certain impaired loans (some of which may be contractually current), and TDR loans that have not yet established a satisfactory period of payment performance (some of which may be contractually current). Non-performing assets include non-performing loans and REO. The table below sets forth the amounts and categories of our non-performing assets at the dates indicated.

	March 31,			December 31,
	2016			2015
	(Dollars in thousands)
Non-accrual loans:
Real estate loans:
One- to four-family residential	$	2,983		$	2,893
Commercial		5,253			3,628
Home equity loans and lines of credit		214			320
Residential construction		—			—
Other construction and land		470			384
Commercial		62			55
Consumer		—			—
Total non-performing loans		8,982			7,280
REO:
One- to four-family residential		1,795			1,384
Commercial real estate		1,097			1,123
Residential construction		—			—
Other construction and land		2,538			2,862
Total foreclosed real estate		5,430			5,369
Total non-performing assets	$	14,412		$	12,649
Troubled debt restructurings still accruing	$	10,565		$	11,206
Ratios:
Non-performing loans to total loans		1.42	%		1.17	%
Non-performing assets to total assets		1.37	%		1.23	%

Non-performing loans increased $1.7 million, or 23.4%, to $9.0 million at March 31, 2016 from $7.3 million at December 31, 2015. The increase in non-performing loans was primarily attributable due to the addition of a single $1.7 million hospitality loan, for which no loss is expected.

Real estate owned remained unchanged at $5.4 million at March 31, 2016 compared to December 31, 2015.

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Classification of Loans

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 immediately.

	At March 31,			At December 31,
	2016			2015
	(Dollars in thousands)
Classified loans:
Substandard	$	20,694		$	19,196
Doubtful		—			—
Loss		—			—
Total classified loans:		20,694			19,196
As a % of total loans, net		3.27	%		3.08	%
Special mention		20,790			19,195
Total criticized loans	$	41,484		$	38,391
As a % of total loans, net		6.55	%		6.15	%

Total classified loans increased $1.5 million, or 7.8%, to $20.7 million at March 31, 2016 from $19.2 million at December 31, 2015. Total criticized loans increased $3.1 million, or 8.1%, to $41.5 million at March 31, 2016 from $38.4 million at December 31, 2015. As mentioned above, these increases were primarily attributable due to the addition of a single $1.7 million hospitality loan, for which no loss is expected. Management continues to dedicate significant resources to monitoring and resolving classified and criticized loans.

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 loans classified as “substandard” or nonaccrual and greater than $350,000 for impairment. 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 or sale of the property 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 an average loss rate for the last 16 quarters. Prior to the first quarter of 2015, we more heavily weighted the most recent four quarters than the least recent four quarters. Beginning in the first quarter of 2015, we no longer weight any quarters to calculate our average loss rates. This change in weighting did not have a material impact on our allowance for loan losses methodology. The loss rates for the base loss reserve are segmented into 13 loan categories and contain loss rates ranging from approximately 0.5% to 11%.

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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 are decreased for favorable trends and increased for unfavorable trends. These factors are subject to further adjustment as economic and other conditions change.

The following table sets forth activity in our allowance for loan losses at the dates and for the periods indicated.

	As of or for the Three Months Ended March 31,
	2016			2015
	( Dollars in thousands)
Balance at beginning of period	$	9,461		$	11,072
Charge-offs:
Real Estate:
One- to four-family residential		46			219
Commercial		—			30
Home equity loans and lines of credit		37			109
Residential construction		—			—
Other construction and land		317			19
Commercial		—			—
Consumer		10			13
Total charge-offs		410			390
Recoveries:
Real Estate:
One- to four-family residential		23			109
Commercial		—			92
Home equity loans and lines of credit		113			23
Residential construction		—			—
Other construction and land		77			119
Commercial		118			7
Consumer		116			79
Total recoveries		447			429
Net charge-offs (recoveries)		(37	)		(39	)
Provision for loan losses		—			(1,500	)
Balance at end of period	$	9,498		$	9,611
Ratios:
Net charge-offs to average loans outstanding		(0.02	)%		(0.03	)%
Allowance to non-performing loans at period end		105.74	%		73.31	%
Allowance to total loans at period end		1.50	%		1.75	%

We have continued to experience limited charge-off amounts and stable collections of amounts previously charged-off. The overall historical loss rate used in our allowance for loan losses calculation continues to decline as previous quarters with larger loss rates are eliminated from the calculation as time passes. Our coverage ratio of non-performing loans remained strong at 105.74% at March 31, 2016 compared to 73.31% at March 31, 2015 and 129.96% at December 31, 2015.

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Real Estate Owned (REO)

The table below summarizes the balances and activity in REO at the dates and for the periods indicated.

	March 31,		December 31,
	2016		2015
	(Dollars in thousands)
One- to four-family residential	$	1,795	$	1,384
Commercial real estate		1,097		1,123
Residential construction		—		—
Other construction and land		2,538		2,862
Total	$	5,430	$	5,369

	Three Months Ended March 31,
	2016			2015
	(Dollars in thousands)
Balance, beginning of period	$	5,369		$	4,425
Additions		508			1,317
Disposals		(105	)		(757	)
Writedowns		(342	)		(68	)
Balance, end of period	$	5,430		$	4,917

Real estate owned remained unchanged at $5.4 million at March 31, 2016 compared to December 31, 2015. Most of the transfers to real estate owned during the quarter were 1-4 family residential properties which are normally sold at a faster pace than other property types. We have experienced a significant decrease in the number and dollar amount of additions to REO, and have had moderate success in liquidating REO. Our policy continues to be to aggressively market REO for sale, including recording write-downs when necessary.

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.

Net deferred tax assets decreased $2.0 million, or 10.6%, to $16.8 million at March 31, 2016 compared to $18.8 million at December 31, 2015. The decrease in net deferred tax assets is mainly attributable to reductions in our federal and state net operating losses and improvement in the net unrealized holding gains/losses on our investment securities.

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Deposits

The following table presents deposits by category and percentage of total deposits as of the dates indicated.

	As of					As of
	March 31, 2016					December 31, 2015
	Balance		Percent			Balance		Percent
	(Dollars in thousands)
Deposit type:
Savings accounts	$	35,915		5.0	%	$	35,838		5.0	%
Time depsosits		267,420		37.1			276,142		38.5
Money market accounts		193,775		26.9			180,377		25.2
Interest-bearing demand accounts		105,374		14.6			103,198		14.4
Noninterest-bearing demand accounts		118,228		16.4			121,062		16.9
Total deposits	$	720,712		100.0	%	$	716,617		100.0	%

Total deposits increased $4.1 million, or 0.6%, to $720.7 million at March 31, 2016 from $716.6 million at December 31, 2015. We continue our efforts to reduce our reliance on time deposits and expand our core deposit relationships which is evidenced by the decrease in time deposits as a percentage of total deposits to 37.1% at March 31, 2016 from 38.5% at December 31, 2015.

FHLB Advances

FHLB advances increased $10.0 million to $163.5 million at March 31, 2016 compared to $153.5 million at December 31, 2015. The additional funds were used to invest in loans and investment securities and to provide funding for future cash needs. The advances had a weighted average rate of 0.75% as of March 31, 2016 compared to 0.65% at December 31, 2015.

Junior Subordinated Notes

We had $14.4 million in junior subordinated notes outstanding at March 31, 2016 and December 31, 2015 payable to an unconsolidated subsidiary. These notes accrue interest at 2.80% above the 90-day LIBOR, adjusted quarterly. The effective interest rate was 3.43% and 3.34% at March 31, 2016 and December 31, 2015, respectively.

Equity

Total equity increased $2.8 million, or 2.1%, to $134.2 million at March 31, 2016 from $131.5 million at December 31, 2015. This increase was the result of $1.4 million of net income for the period, and a $2.5 million improvement in net unrealized holding gains and losses on securities available for sale, which were partially offset by $1.3 million in repurchases of common stock.

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Comparison of Operating Results for the Three Months Ended March 31, 2016 and March 31, 2015.

General.Net income for the three months ended March 31, 2016 was $1.4 million compared to $2.6 million for the same period in 2015. The decrease in net income for the quarter was primarily the result of a negative provision of $1.5 million during the 2015 period and increases in noninterest expense of $0.7 million and income tax expense of $0.7 million during the 2016 period. These changes were partially offset by a $1.3 million increase in net interest income and an increase of $0.3 million in noninterest income during the 2016 period.

Net Interest Income.Net interest income increased $1.3 million, or 20.4%, to $7.6 million for the three months ended March 31, 2016 compared to the same period in 2015. The increase in net interest income for the period was primarily the result of increases in interest and fee income on loans of $0.7 million and interest on taxable securities of $0.2 million along with a decrease in interest expense on deposits of $0.2 million.

The tax-equivalent net interest margin increased to 3.22% for the quarter ended March 31, 2016 compared to 3.04% for the same period in 2015. The increase in margin was primarily the result of increased yields on taxable investments and decreased rates on deposits and FHLB advances.

The following table sets forth the average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets on a tax-equivalent basis, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average tax-equivalent yields and cost 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.

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	For the Three Months Ended March 31,
	2016							2015
	Average Outstanding Balance		Interest		Yield/ Rate			Average Outstanding Balance		Interest		Yield/ Rate
	(Dollars in thousands)
Interest-earning assets:
Loans, including loans held for sale	$	633,048	$	7,206		4.57	%	$	549,862	$	6,470		4.72	%
Loans, tax exempt(1)		6,543		68		4.18	%		3,230		39		4.89	%
Investments - taxable		260,619		1,458		2.24	%		245,274		1,236		2.02	%
Investment tax exempt(1)		17,713		217		4.91	%		6,605		106		6.44	%
Interest earning deposits		33,468		36		0.43	%		42,164		24		0.23	%
Other investments, at cost		8,951		105		4.71	%		4,906		58		4.74	%
Total interest-earning assets		960,342		9,090		3.80	%		852,041		7,933		3.78	%
Noninterest-earning assets		75,923							48,700
Total assets	$	1,036,265						$	900,741
Interest-bearing liabilities:
Savings accounts	$	35,619	$	10		0.11	%	$	27,952	$	8		0.11	%
Time deposits		272,753		757		1.11	%		318,553		1,011		1.27	%
Money market accounts		189,334		148		0.31	%		177,939		154		0.35	%
Interest bearing transaction accounts		102,706		27		0.11	%		90,612		36		0.16	%
Total interest bearing deposits		600,412		942		0.63	%		615,056		1,209		0.79	%
FHLB advances		156,247		275		0.71	%		60,161		205		1.37	%
Junior subordinated debentures		14,433		126		3.50	%		14,433		112		3.11	%
Other borrowings		2,218		26		4.70	%		1,801		26		5.79	%
Total interest-bearing liabilities		773,310		1,369		0.71	%		691,451		1,552		0.91	%
Noninterest-bearing deposits		116,440							86,031
Other non interest bearing liabilities		13,225							13,792
Total liabilities		902,975							791,274
Total equity		133,290							109,467
Total liabilities and equity	$	1,036,265						$	900,741
Tax-equivalent net interest income			$	7,721						$	6,381
Net interest-earning assets(2)	$	187,032						$	160,590
Average interest-earning assets to interest-bearing liabilities		1.24							1.23
Tax-equivalent net interest rate spread(3)						3.09	%						2.87	%
Tax-equivalent net interest margin(4)						3.22	%						3.04	%

(1) Tax exempt loans and investments are calculated giving effect to a 34% federal tax rate.

(2) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.

(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) Tax-equivalent net interest margin represents tax equivalent net interest income divided by average total interest-earning assets.

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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 change 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 changes due to rate and the changes due to volume.

	For the Three Months Ended March 31, 2016 Compared to the Three Months Ended March 31, 2015
	Volume			Rate			Total
	(Dollars in thousands)
Interest-earning assets:
Loans, including loans held for sale (1)	$	1,012		$	(276	)	$	736
Loans, tax exempt (2)		35			(7	)		28
Investment - taxable		87			136			223
Investments - tax exempt (2)		142			(32	)		110
Interest-earning deposits		(6	)		18			12
Other investments, at cost		48			(1	)		47
Total interest-earning assets		1,318			(162	)		1,157
Interest-bearing liabilities:
Savings accounts	$	2		$	—		$	2
Time deposits		(131	)		(123	)		(254	)
Money market accounts		10			(16	)		(6	)
Interest bearing transaction accounts		4			(14	)		(10	)
FHLB advances		209			(139	)		70
Junior subordinated debentures		—			14			14
Other borrowings		—			—			—
Total interest-bearing liabilities		94			(278	)		(183	)
Change in tax-equivalent net interest income	$	1,224		$	116		$	1,340

(1) Non-accrual loans are included in the above analysis.

(2) Interest income on tax exempt loans and investments are adjusted for based on a 35% federal tax rate.

Net interest income before provision for loan losses increased to $7.6 million for the three months ended March 31, 2016, compared to $6.3 million for the same period in 2015. As indicated in the table above, an increase in net interest income of $1.2 million attributable to an improvement in volume was supplemented by a $0.1 million improvement in net interest earned attributable to a reduction in rates.

The increase in tax-equivalent net interest income of $1.2 million related to volume was primarily the result of higher average loan and taxable investment balances which increased $86.5 million and $15.3 million, respectively, for the three months ended March 31, 2016 as compared to the same period in 2015. The increase in average loan and investment balances was partially offset by higher average FHLB advance balances which increased $96.1 million over the same periods.

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The increase in tax-equivalent net interest income of $0.1 million related to rate was primarily the result of decreased deposit and FHLB advance rates partially offset by decreased loan yields. The decrease in average loan yields was mostly offset by the impact of lower average interest bearing deposit yields which decreased 16 basis points to 0.63% in the quarter ended March 31, 2016 as compared to 0.79% in the three months ending March 31, 2015. In addition, a reduction in average rates on FHLB advances from 1.37% during the three months ended March 31, 2015 to 0.71% for the three months ended March 31, 2016 also contributed to the increase in this component of net interest income.

Our tax-equivalent net interest rate spread increased by 22 basis points to 3.09% for the three months ended March 31, 2016 compared to 2.87% for the three months ended March 31, 2015, and our tax-equivalent net interest margin increased 18 basis points to 3.22% for the three months ended March 31, 2016, compared to 3.04% for the three months ended March 31, 2015. The increases in our interest rate spread and margin were primarily a result of decreased rates on deposits and FHLB advances.

Provision for Loan Losses.For the three months ended March 31, 2016, we did not record a provision for loan losses compared to a negative provision of $1.5 million for the same period in the prior year. Factors contributing to no recorded provision for loan losses were the continued stabilization in asset quality, significantly reduced charge-off amounts, and a continued decline in the overall loss rates used in our allowance for loan losses model.

Noninterest Income.The following table summarizes the components of noninterest income and the corresponding change between the three month periods ended March 31, 2016 and 2015:

	Three Months Ended March 31,
	2016		2015		Change
	(Dollars in thousands)
Servicing income, net	$	116	$	86	$	30
Mortgage banking		140		255		(115	)
Gain on sale of SBA loans		334		211		123
Gain on sale of investments, net		269		164		105
Service charges on deposit accounts		394		298		96
Interchange fees		342		278		64
Bank owned life insurance		107		129		(22	)
Other		173		118		55
Total	$	1,875	$	1,539	$	336

The $0.1 million decrease in mortgage banking income is primarily due to decreased volume and changes in the valuation of mortgage banking derivatives compared to the prior year.

Gains on sales of SBA loans increased $0.1 million as a result of a larger balance of SBA loans being sold during the 2016 period as we continue to increase our SBA lending efforts.

Net gains on sales of investments increased $0.1 million for the three months ended March 31, 2016 compared to the three months ended March 31, 2015 due to increased sales of securities.

Service charges on deposit accounts and interchange fees both increased $0.1 million as a result of increased core deposit accounts and the acquisition of approximately $39.9 million in deposits from Arthur State Bank that occurred during December 2015.

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Noninterest Expense.The following table summarizes the components of noninterest expense and the corresponding change between the three months ended March 31, 2016 and 2015:

	Three Months Ended March 31,
	2016		2015		Change
	(Dollars in thousands)
Compensation and employee benefits	$	4,010	$	3,697	$	313
Net occupancy		817		702		115
Federal deposit insurance		176		284		(108	)
Professional and advisory		212		250		(38	)
Data processing		351		280		71
Merger-related expenses		145		—		145
Net cost of operation of real estate owned		286		216		70
Other		1,282		1,147		135
Total noninterest expenses	$	7,279	$	6,576	$	703

Compensation and employee benefits increased by $0.3 million, or 8.5%, for the three months ended March 31, 2016 compared to the three months ended March 31, 2015. This additional expense is related to increases in our number of employees, annual raises, employee benefits, incentives and commissions. The 2016 period includes the addition of three branches in South Carolina that were added after the first quarter of 2015.

Merger-related expenses were $0.1 million for the three months ended March 31, 2016 compared to none during the 2015 period. The expenses during the period related to both the acquisition of two branches in December 2015 and the whole bank acquisition of Oldtown which closed on April 1, 2016.

The net cost of operation of real estate owned increased $0.1 million, or 32.4%, for the three months ended March 31, 2016 compared to the three months ended March 31, 2015. The increase primarily relates to the write-down and disposal of one property that had been held for an extended period of time.

Income Taxes.We recorded $0.9 million of income tax expense for the three months ended March 31, 2016, primarily reflecting deferred tax expense. Our effective tax rate of 38.5% for the three months ended March 31, 2016 was unusually high as a result of the reduction of $0.2 million of the valuation allowance related to net deferred tax assets on investment securities that remains in accumulated other comprehensive income. Exclusive of this write-off, our effective tax rate would have been approximately 34.7%. We remain focused on reducing our effective tax rate through further investments in tax-free municipal securities, BOLI and affordable housing tax credits.

We continue to be in a net operating loss position for federal and state income tax purposes and do not have a material current tax liability or receivable.

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, proceeds from the sale of loans originated for sale, and 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 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 March 31, 2016.

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 and FRB interest-earning deposits and investment securities and are also used to pay off short-term borrowings. At March 31, 2016, cash and cash equivalents totaled $45.9 million. Included in this total was $2.5 million held at FRB and $35.9 million held at the FHLB in interest-earning accounts.

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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. The following summarizes the most significant sources and uses of liquidity during the three months ended March 31, 2016 and 2015:

	Three Months Ended March 31,
	2016			2015
	(Dollars in thousands)
Operating activities:
Loans originated for sale	$	(2,932	)	$	(4,703	)
Proceeds from loans originated for sale		6,520			8,698
Investing activities:
Purchases of investments	$	(53,998	)	$	(37,550	)
Maturities and principal repayments of investments		15,000			12,132
Sales of investments		34,717			13,197
Net increase in loans		(8,795	)		(216	)
Purchase of loans		—			(13,367	)
Purchases of fixed assets		(144	)		(2,414	)
Financing activities:
Net increase (decrease) in deposits	$	3,667		$	(3,674	)
Proceeds from FHLB advances		125,000			25,000
Repayment of FHLB advances		(115,000	)		(10,000	)

At March 31, 2016, we had $37.7 million in outstanding commitments to originate loans. In addition to commitments to originate loans, we had $84.3 million in unused lines of credit.

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. 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 March 31, 2016.

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, producing higher than otherwise scheduled cash flows.

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 and the FRB discount window. The following summarizes our borrowing capacity as of March 31, 2016:

	Total		Used		Unused
(Dollars in thousands)	Capacity		Capacity		Capacity
FHLB	$	177,503	$	163,500	$	14,003
Unpledged Marketable Securities		294,084		83,294		210,790
FRB		45,948		—		45,948
	$	517,535	$	246,794	$	270,741

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In addition to the amounts noted in the table above, we have the ability to pledge additional loans and increase our borrowing capacity with the FHLB.

In July 2013, federal bank regulatory agencies issued final rules to revise their risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act (“Basel III”). On January 1, 2015, the Basel III rules became effective and include transition provisions which implement certain portions of the rules through January 1, 2019.

The rule also includes changes in what constitutes regulatory capital, some of which are subject to a transition period. These changes include the phasing-out of certain instruments as qualifying capital. In addition, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of common stock are required to be deducted from capital, subject to a transition period. Finally, common equity Tier 1 capital includes accumulated other comprehensive income (which includes all unrealized gains and losses on available for sale debt and equity securities), subject to a transition period and a one-time opt-out election. The Bank elected to opt-out of this provision. As such, accumulated comprehensive income is not included in the Bank’s Tier 1 capital.

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.

Beginning on January 1, 2016, the Company and its subsidiary bank must maintain a capital conservation buffer to avoid restrictions on capital distributions or discretionary bonus payments. This buffer must consist solely of Common Equity Tier 1 Capital, but the buffer applies to all three measurements (Common Equity Tier 1, Tier 1 capital and total capital) in addition to the minimum risk-based capital requirements. The capital conservation buffer required for 2016 is common equity equal to .626% of risk-weighted assets and will increase by .625% per year until reaching 2.5% beginning January 1, 2019. 

The tables below summarize capital ratios and related information in accordance with Basel III as measured at March 31, 2016 and pre-existing rules at December 31, 2015.

The following table summarizes the required and actual capital ratios of the Bank as of the dates indicated:

	Actual					For Capital Adequacy Purposes			To Be Well- Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Ratio			Amount		Ratio	Amount		Ratio
As of March 31, 2016:
Tier 1 Leverage Capital	$	120,296		11.74	%	$	40,988	>4%	$	51,234	>5%
Common Equity Tier 1 Capital	$	120,296		18.01	%	$	30,051	>4.5%	$	43,408	>6.5%
Tier 1 Risk-based Capital	$	120,296		18.01	%	$	40,069	>6%	$	53,425	>8%
Total Risk-based Capital	$	128,707		19.27	%	$	53,425	>8%	$	66,781	>10%
As of December 31, 2015:
Tier 1 Leverage Capital	$	118,251		12.05	%	$	39,270	>4%	$	49,087	>5%
Common Equity Tier 1 Capital	$	118,251		18.07	%	$	29,443	>4.5%	$	42,529	>6.5%
Tier 1 Risk-based Capital	$	118,251		18.07	%	$	39,257	>6%	$	52,343	>8%
Total Risk-based Capital	$	126,524		19.34	%	$	52,343	>8%	$	65,429	>10%

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The Company exceeded its regulatory capital ratios at March 31, 2016 and December 31, 2015, as set forth in the following table:

	Actual					For Capital Adequacy Purposes
(Dollars in thousands)	Amount		Ratio			Amount		Ratio
As of March 31, 2016:
Tier I Leverage Capital	$	137,050		13.38	%	$	40,977	>4%
Common Equity Tier 1 Capital	$	126,556		18.94	%	$	30,075	>4.5%
Tier I Risk-based Capital	$	137,050		20.51	%	$	40,101	>6%
Total Risk Based Capital	$	145,467		21.77	%	$	53,468	>8%
As of December 31, 2015:
Tier I Leverage Capital	$	136,063		13.85	%	$	39,291	>4%
Common Equity Tier 1 Capital	$	128,007		19.55	%	$	29,468	>4.5%
Tier I Risk-based Capital	$	136,063		20.78	%	$	39,291	>6%
Total Risk Based Capital	$	144,343		22.04	%	$	52,388	>8%

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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 economic value of equity (“EVE”) by changing the net present value of a bank’s future cash flows, and the cash flows themselves as rates change. Accepting this risk is a 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 Board of Directors of the Bank have established an Asset/Liability Management Committee (“ALCO”), 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 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.

One of the primary ways we manage interest rate risk is by selling the majority of our long-term fixed rate mortgages into the secondary markets, and obtaining commitments to sell at locked-in interest rates prior to issuing a loan commitment. From a funding perspective, we expect to satisfy the majority of our future requirements with retail deposit growth, including checking and savings accounts, money market accounts and certificates of deposit generated within our primary markets. If our funding needs exceed our deposits, we will utilize our excess funding capacity with the FHLB and the FRB.

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 loans within our portfolio;

• utilized our securities portfolio for positioning based on projected interest rate environments;

• priced certificates of deposit to encourage customers to extend to longer terms;

• increased our level of variable-rate investments and loans;

• utilized FHLB advances for positioning.

We have not conducted hedging activities, such as engaging in futures, options or swap transactions.

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 income simulations. 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 estimates 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 EVE calculation for an interest rate decrease of greater than 100 basis points has not been prepared.

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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 Pretax Net Interest Income (NII) and Economic Value of Equity (EVE).

	March 31, 2016		December 31, 2015
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
+400	4.9	(8.8)	4.9	(14.5)
+300	3.7	(7.5)	3.5	(11.6)
+200	2.4	(5.9)	2.0	(9.1)
+100	1.2	(4.0)	0.8	(5.9)
—	—	—	—	—
-100	(3.5)	7.1	(2.5)	10.7

The results from the rate shock analysis on NII are consistent with having a slightly asset sensitive balance sheet. Having an asset sensitive balance sheet means assets will reprice at a faster pace than liabilities during the short-term horizon. 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, the interest rate on assets will decrease at a faster pace than liabilities. This situation generally results in a decrease in NII and operating income. Conversely, with an asset sensitive balance sheet in a rising interest rate environment, the interest rate on assets will increase at a faster pace than liabilities. This situation generally results 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 2.4% increase in NII as of March 31, 2016 as compared to a 2.0% increase in NII as of December 31, 2015, suggesting that the Company’s exposure to the benefit of rising interest rates has increased slightly since December 31, 2015. The Company generally seeks to remain neutral to the impact of changes in interest rates by maximizing current earnings while balancing the risk of changes in interest rates.

The results from the rate shock analysis on EVE are consistent with a balance sheet whose assets have a longer maturity than its liabilities. Like most financial institutions, we generally invest in longer maturity assets as compared to our liabilities in order to earn a higher return on our assets than we pay on our liabilities. This is because interest rates generally increase as the time to maturity increases, assuming a normal, upward sloping yield curve. In a rising interest rate environment, this results in a negative EVE because higher interest rates will reduce the present value of longer term assets more than it will reduce the present value of shorter term liabilities, resulting in a negative impact on equity. As noted in the table above, our exposure to higher interest rates from an EVE or present value perspective has decreased slightly from December 31, 2015 to March 31, 2016. For example, as indicated in the table above, a 200 basis point increase in rates would result in a 5.9% decrease in EVE as of March 31, 2016 as compared to a 9.1% decrease in EVE as of December 31, 2015.

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Item 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company’s management, including its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of its disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of March 31, 2016. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer each concluded that as of March 31, 2016, the end of the period covered by this Quarterly Report on Form 10-Q, the Company maintained effective disclosure controls and procedures.

Changes in Internal Control over Financial Reporting

There have been no changes to the Company’s internal controls over financial reporting that occurred during the quarter ended March 31, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are not involved in any material pending legal proceedings. In the ordinary course of operations, we are often involved in legal proceedings. In the opinion of management, neither the Company nor the Bank is a party to, nor is their property the subject of, any material pending legal proceedings, other than ordinary routine litigation incidental to their business, nor has any such proceeding been terminated during the quarter ended March 31, 2016.

Item 1A. Risk Factors

There have been no material changes to the risk factors that we have previously disclosed in the “Risk Factors” section in our 2015 Annual Report on Form 10-K as filed with the SEC on March 15, 2016.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On January 28, 2016, the Company announced that the Board of Directors had authorized the repurchase of up to 327,318 shares of the Company’s common stock through January 27, 2017. The authorization represented approximately 5% of the Company’s shares outstanding as of December 31, 2015.

The table below sets forth information regarding the Company’s common stock repurchases during the three months ended March 3016:

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1, 2016 to January 31, 2016		—	$	—		—		—
February 1, 2016 to February 29, 2016		40,621	$	17.04		40,621		286,697
March 1, 2016 to March 31, 2016		33,382	$	17.10		33,382		253,315
Total year-to-date		74,003	$	17.07		74,003		253,315

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

None

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Item 6. Exhibits

Exhibit No.	Description
2	Plan of Conversion, incorporated by reference to Exhibit 2 of the Registration Statement on Form S-1, filed with the SEC on March 18, 2014 (SEC File No. 333-194641).
3.1	Articles of Incorporation of Entegra Financial Corp., as amended and restated, incorporated by reference to Exhibit 3.1 of the Registration Statement on Form S-1, filed with the SEC on March 18, 2014 (SEC File No. 333-194641).
3.2	Bylaws of Entegra Financial Corp., as amended and restated, incorporated by reference to Exhibit 3.2 of the Registration Statement on Form S-1, filed with the SEC on March 18, 2014 (SEC File No. 333-194641).
3.3	Articles of Amendment of Entegra Financial Corp., incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed with the SEC on November 16, 2015 (SEC File No. 001-35302).
4	Form of Common Stock Certificate of Entegra Financial Corp., incorporated by reference to Exhibit 4 of the Registration Statement on Form S-1/A, filed with the SEC on June 27, 2014 (SEC File No. 333-194641).
10.1	Employment and Change of Control Agreement, dated as of October 9, 2014, by and among Entegra Financial Corp., Macon Bank, Inc., and Roger D. Plemens, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K, filed with the SEC on October 15, 2014 (SEC File No. 001-35302)*
10.2	Employment and Change of Control Agreement, dated as of November 1, 2014, by and among Entegra Financial Corp., Macon Bank, Inc., and Ryan M. Scaggs, incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K, filed with the SEC on November 6, 2014 (SEC File No. 001-35302)*
10.3	Employment and Change of Control Agreement, dated as of November 1, 2014, by and among Entegra Financial Corp., Macon Bank, Inc., and David A. Bright, incorporated by reference to Exhibit 10.2 of the Current Report on Form 8-K, filed with the SEC on November 6, 2014 (SEC File No. 001-35302)*
10.4	Form 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, incorporated by reference to Exhibit 10.4 of the Registration Statement on Form S-1, filed with the SEC on March 18, 2014 (SEC File No. 333-194641).*
10.5	Amended and Restated Trust Agreement, regarding Trust Preferred Securities, dated as of December 30, 2003 incorporated by reference to Exhibit 10.6 of the Registration Statement on Form S-1, filed with the SEC on March 18, 2014 (SEC File No. 333-194641).
10.6	Guarantee Agreement, regarding Trust Preferred Securities, dated as of December 30, 2003 incorporated by reference to Exhibit 10.7 of the Registration Statement on Form S-1, filed with the SEC on March 18, 2014 (SEC File No. 333-194641).
10.7	Junior Subordinated Indenture, regarding Trust Preferred Securities, dated as of December 30, 2003 incorporated by reference to Exhibit 10.8 of the Registration Statement on Form S-1, filed with the SEC on March 18, 2014 (SEC File No. 333-194641).
10.8	Salary Continuation Agreement between Macon Bank, Inc. and Carolyn H. Huscusson, dated November 6, 2007, incorporated by reference to Exhibit 10.11 of the Registration Statement on Form S-1/A, filed with the SEC on May 14, 2014 (SEC File No. 333-194641).*

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10.9	Salary Continuation Agreement between Macon Bank, Inc. and Roger D. Plemens, dated June 23, 2003, incorporated by reference to Exhibit 10.12 of the Registration Statement on Form S-1/A, filed with the SEC on May 14, 2014 (SEC File No. 333-194641).*
10.10	Entegra Financial Corp. 2015 Long-Term Stock Incentive Plan incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K, filed with the SEC on May 21, 2015. (SEC File No. 001-35302)
10.11	Tax Benefits Preservation Plan, dated as of November 16, 2015, incorporated by reference to Exhibit 4.1 of the Current Report on Form 8-K, filed with the SEC on November 16, 2015 (SEC File No. 001-35302)
10.12	Macon Bank, Inc. Long-Term Capital Appreciation Plan, as amended and restated, dated December 15, 2004, incorporated by reference to Exhibit 10.12 of the Annual Report on Form 10-K, filed with the SEC on March 15, 2016 (SEC File No. 001-35302)
10.13	First Amendment to the Macon Bank, Inc. Amended and Restated Long-Term Capital Appreciation Plan, dated December 10, 2008, incorporated by reference to Exhibit 10.13 of the Annual Report on Form 10-K, filed with the SEC on March 15, 2016 (SEC File No. 001-35302)
10.14	Second Amendment to the Macon Bank, Inc. Amended and Restated Long-Term Capital Appreciation Plan, dated March 16, 2011, incorporated by reference to Exhibit 10.14 of the Annual Report on Form 10-K, filed with the SEC on March 15, 2016 (SEC File No. 001-35302)
10.15	Third Amendment to the Macon Bank, Inc. Amended and Restated Long-Term Capital Appreciation Plan, dated February 26, 2015, incorporated by reference to Exhibit 10.15 of the Annual Report on Form 10-K, filed with the SEC on March 15, 2016 (SEC File No. 001-35302)
31.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	Financial Statements filed in XBRL format.
*	Management contract or compensatory plan, contract or arrangement.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: May 6, 2016	Entegra Financial Corp.
(Registrant)
	By:	/s/David A. Bright
		Name:David A. Bright
		Title: Chief Financial Officer
		(Authorized Officer)

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EXHIBIT INDEX

Exhibit No.	Description
31.01	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.02	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.01	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	Financial Statements filed in XBRL format.

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