Entegra Financial Corp. - FORM 10-Q

Attached files

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EX-32.01 - Entegra Financial Corp.	e17494_ex32-1.htm
EX-31.02 - Entegra Financial Corp.	e17494_ex31-2.htm
EX-31.01 - Entegra Financial Corp.	e17494_ex31-1.htm

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:

September 30, 2017

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. Yes x No o

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). Yes x No o

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”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

Smaller reporting company o

Emerging growth company x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: On November 8, 2017, 6,854,345 shares of the issuer’s common stock (no par value), were issued and outstanding.

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 – September 30, 2017 and December 31, 2016 (Audited)	3
	Consolidated Statements of Income – Three and Nine Months Ended September 30, 2017 and 2016	4
	Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 2017 and 2016	5
	Consolidated Statements of Changes in Shareholders’ Equity – Nine Months Ended September 30, 2017 and 2016	6
	Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2017 and 2016	7
	Notes to Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	47
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	75
Item 4.	Controls and Procedures	77

PART II. OTHER INFORMATION		78

Item 1.	Legal Proceedings	78
Item 1A.	Risk Factors	78
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	78
Item 3.	Defaults Upon Senior Securities	78
Item 4.	Mine Safety Disclosures	78
Item 5.	Other Information	78
Item 6.	Exhibits	79
	Signatures

Item 1. Financial Statements

ENTEGRA FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

	September 30,			December 31,
	2017			2016
	(Unaudited)			(Audited)
Assets

Cash and due from banks	$	15,535		$	10,709
Interest-earning deposits		78,963			32,585
Cash and cash equivalents		94,498			43,294

Investments - trading		5,840			5,211
Investments - available for sale		401,226			398,291
Other investments, at cost		12,633			15,261
Loans held for sale		3,818			4,584
Loans receivable		817,034			744,361
Allowance for loan losses		(10,057	)		(9,305	)
Fixed assets, net		20,888			20,209
Real estate owned		2,437			4,226
Interest receivable		5,436			5,012
Bank owned life insurance		31,950			31,347
Small Business Investment Company Holdings, at cost		3,090			1,655
Net deferred tax asset		14,478			18,985
Loan servicing rights		2,713			2,603
Goodwill		7,144			2,065
Core deposit intangible		2,371			979
Other assets		4,334			4,099

Total assets	$	1,419,833		$	1,292,877

Liabilities and Shareholders’ Equity

Liabilities:
Deposits	$	1,004,839		$	830,013
Federal Home Loan Bank advances		233,500			298,500
Junior subordinated notes		14,433			14,433
Other borrowings		8,588			2,725
Post employment benefits		10,145			10,211
Accrued interest payable		910			254
Other liabilities		3,893			3,673
Total liabilities		1,276,308			1,159,809

Commitments and contingencies (Note 13)

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; 6,458,679 and 6,467,550 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively		—			—
Common stock held by Rabbi Trust, at cost; 14,000 shares at September 30, 2017 and December 31, 2016		(279	)		(279	)
Additional paid in capital		63,031			62,664
Retained earnings		82,012			76,139
Accumulated other comprehensive loss		(1,239	)		(5,456	)
Total shareholders’ equity		143,525			133,068

Total liabilities and shareholders’ equity	$	1,419,833		$	1,292,877

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

ENTEGRA FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(Dollars in thousands, except per share data)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2017			2016		2017			2016
	(Unaudited)			(Unaudited)		(Unaudited)			(Unaudited)
Interest income:
Interest and fees on loans	$	9,175		$	8,424	$	26,686		$	23,885
Interest on tax exempt loans		98			99		285			242
Taxable securities		1,787			1,294		5,367			4,174
Tax-exempt securities		817			432		2,346			881
Interest-earning deposits		216			62		459			152
Other		161			133		478			360
Total interest income		12,254			10,444		35,621			29,694

Interest expense:
Deposits		1,114			1,007		3,227			2,981
Federal Home Loan Bank advances		641			371		1,713			965
Junior subordinated notes		140			140		418			394
Other borrowings		36			29		100			85
Total interest expense		1,931			1,547		5,458			4,425

Net interest income		10,323			8,897		30,163			25,269

Provision for loan losses		520			100		1,160			100
Net interest income after provision for loan losses		9,803			8,797		29,003			25,169

Noninterest income:
Servicing income, net		59			72		312			263
Mortgage banking		207			387		771			747
Gain on sale of SBA loans		290			124		436			742
Gain (loss) on sale of investments, net		(24	)		407		19			1,105
Trading securities gains		138			93		445			271
Other than temporary impairment on available-for-sale securities		—			—		(700	)		—
Service charges on deposit accounts		436			370		1,239			1,151
Interchange fees		484			385		1,374			1,109
Bank owned life insurance		208			110		603			311
Other		215			118		527			341
Total noninterest income		2,013			2,066		5,026			6,040

Noninterest expenses:
Compensation and employee benefits		4,937			4,471		14,859			12,738
Net occupancy		974			929		2,851			2,580
Federal deposit insurance		140			108		379			468
Professional and advisory		292			208		929			713
Data processing		390			406		1,215			1,157
Marketing and advertising		253			309		727			811
Merger-related expenses		116			107		972			2,023
Net cost of (income from) operation of real estate owned		(121	)		167		94			663
Other		1,237			1,137		3,666			3,281
Total noninterest expenses		8,218			7,842		25,692			24,434

Income before taxes		3,598			3,021		8,337			6,775

Income tax expense		1,127			1,221		2,464			2,751

Net income	$	2,471		$	1,800	$	5,873		$	4,024

Earnings per common share:
Basic	$	0.38		$	0.28	$	0.91		$	0.62
Diluted	$	0.38		$	0.28	$	0.90		$	0.62

Weighted average common shares outstanding:
Basic		6,458,679			6,466,375		6,460,015			6,483,535
Diluted		6,548,530			6,484,226		6,542,261			6,500,198

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

ENTEGRA FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016

Net income	$	2,471		$	1,800		$	5,873		$	4,024

Other comprehensive income:
Change in unrealized holding gains and losses on securities available for sale		973			(1,390	)		6,404			5,115
Reclassification adjustment for securities losses (gains) realized in net income		24			(407	)		(19	)		(1,105	)
Reclassification adjustment for other than temporary impairment realized in net income		—			—			79			—
Amortization of unrealized loss on securities transferred to held to maturity		—			324			—			894
Change in deferred tax valuation allowance attributable to unrealized gains and losses on investment securities available for sale		54			33			163			328
Change in unrealized holding gains and losses on cash flow hedge		25			83			(43	)		38
Reclassification adjustment for cash flow hedge effectiveness		(12	)		12			8			12
Other comprehensive income (loss), before tax		1,064			(1,345	)		6,592			5,282
Income tax effect related to items of other comprehensive income (loss)		(372	)		548			(2,375	)		(1,836	)
Other comprehensive income (loss), after tax		692			(797	)		4,217			3,446

Comprehensive income	$	3,163		$	1,003		$	10,090		$	7,470

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

ENTEGRA FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

Nine Months Ended September 30, 2017 and 2016

(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, 2015		6,546,375		$	—	$	63,722		$	69,763	$	(1,736	)	$	(279	)	$	131,469

Net income		—			—		—			4,024		—			—			4,024
Other comprehensive income, net of tax		—			—		—			—		3,446			—			3,446
Stock compensation expense		—			—		655			—		—			—			655
Repurchase of common stock		(80,000	)				(1,390	)		—		—			—			(1,390	)
Balance, September 30, 2016		6,466,375		$	—	$	62,987		$	73,786	$	1,710		$	(279	)	$	138,204

Balance, December 31, 2016		6,467,550		$	—	$	62,664		$	76,139	$	(5,456	)	$	(279	)	$	133,068

Net income		—			—		—			5,873		—			—			5,873
Other comprehensive income, net of tax		—			—		—			—		4,217			—			4,217
Stock compensation expense		—			—		687			—		—			—			687
Vesting of restricted stock units, net of 859 shares surrendered		4,129			—		(19	)		—		—			—			(19	)
Repurchase of common stock		(13,000	)				(301	)		—		—			—			(301	)
Balance, September 30, 2017		6,458,679		$	—	$	63,031		$	82,012	$	(1,239	)	$	(279	)	$	143,525

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

ENTEGRA FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)

	For the Nine Months Ended September 30,
	2017			2016
Cash flows from operating activities:
Net income	$	5,873		$	4,024
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion		(36	)		830
Investment amortization, net		3,513			1,485
Trading account income		(445	)		(271	)
Provision for loan losses		1,160			100
Provision for real estate owned		167			575
Share-based compensation expense		687			655
Deferred income tax expense		2,295			2,250
Gain on sales of securities available for sale		(19	)		(1,105	)
Other than temporary impairment on investments		700			—
Income on bank owned life insurance, net		(603	)		(311	)
Mortgage banking income, net		(771	)		(747	)
Gain on sales of SBA loans		(436	)		(742	)
Net realized gain on sale of real estate owned		(215	)		(182	)
Loans originated for sale		(35,718	)		(38,402	)
Proceeds from sale of loans originated for sale		36,548			39,811
Net change in operating assets and liabilities:
Interest receivable		(424	)		(203	)
Loan servicing rights		(110	)		(82	)
Other assets		(285	)		754
Postemployment benefits		(66	)		25
Accrued interest payable		339			1
Other liabilities		669			2,187
Net cash provided by operating activities	$	12,823		$	10,652

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

ENTEGRA FINANCIAL CORP. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited), continued

(Dollars in thousands)


	For the Nine Months Ended September 30,
	2017			2016
Cash flows from investing activities:
Activity for investment securities:
Purchases	$	(127,989	)	$	(152,034	)
Maturities/calls and principal repayments		35,009			28,514
Sales		92,316			115,328
Net increase in loans		(71,578	)		(40,859	)
Net cash received in branch acquisition		146,750			—
Proceeds from sale of real estate owned		1,475			1,973
Proceeds from sale of fixed assets		64			—
Purchase of fixed assets		(594	)		(295	)
Purchase of bank owned life insurance		—			(10,000	)
Purchase of Small Business Investment Company Holdings, at cost		(1,435	)		(652	)
Net cash paid in business combination		—			(5,912	)
Purchase of other investments, at cost		(425	)		(2,048	)
Redemption of other investments, at cost		3,053			—
Net cash provided by (used in) investing activities	$	76,646		$	(65,985	)
Cash flows from financing activities:
Net increase in deposits	$	19,384		$	30,880
Net increase in escrow deposits		1,808			1,247
Net increase in other borrowings		5,863			—
Proceeds from FHLB advances		808,501			445,100
Repayment of FHLB advances		(873,501	)		(399,125	)
Cash paid to tax authorities for shares surrendered upon vesting of restricted stock units		(19	)		—
Purchase of common stock		(301	)		(1,390	)
Net cash provided by (used in) financing activities	$	(38,265	)	$	76,712

Increase in cash and cash equivalents		51,204			21,379

Cash and cash equivalents, beginning of period	$	43,294		$	40,650

Cash and cash equivalents, end of period	$	94,498		$	62,029

Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on deposits and other borrowings	$	5,119		$	4,597
Income taxes	$	172		$	—

Acquisitions
Assets acquired	$	3,997		$	110,020
Liabilities assumed		154,505			97,878
Net assets/liabilities	$	150,508		$	12,142

Noncash investing and financing activities:
Real estate acquired in satisfaction of mortgage loans	$	702		$	698
Investments to be settled		—			257
Loans originated for the disposition of real estate owned		1,001			—
Transfer held to maturity investment securities to available for sale investments securities		—			30,368

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

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 commercial bank and has a wholly owned subsidiary, Entegra Services, Inc., which was inactive as of September 30, 2017. 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, the valuation of acquired loans, separately identifiable intangible assets associated with mergers and acquisitions, the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans, and the valuation of deferred tax assets.

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. Certain mortgage-backed securities were reclassified to either mortgage-backed securities with guarantees, or mortgage-backed securities with no guarantee to better align the investment securities by risk categories. 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, 2017. 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.

Acquisition Activities

The Company accounts for business combinations under the acquisition method of accounting. Assets acquired and liabilities assumed are measured and recorded at fair value at the date of acquisition, including identifiable intangible assets. If the fair value of net assets purchased exceeds the fair value of consideration paid, a bargain purchase gain is recognized at the date of acquisition. Conversely, if the consideration paid exceeds the fair value of the net assets acquired, goodwill is recognized at the acquisition date. Fair values are subject to refinement for a period not to exceed one year after the closing date of an acquisition as information relative to closing date fair values becomes available.

The determination of the fair value of loans acquired takes into account credit quality deterioration and probability of loss; therefore, the related allowance for loan losses is not carried forward.

All identifiable intangible assets that are acquired in a business combination are recognized at fair value on the acquisition date. Identifiable intangible assets are recognized separately if they arise from contractual or other legal rights or if they are separable (i.e., capable of being sold, transferred, licensed, rented, or exchanged separately from the entity). Deposit liabilities and the related depositor relationship intangible assets may be exchanged in observable exchange transactions. As a result, the depositor relationship intangible asset is considered identifiable, because the separability criterion has been met.

Recent Accounting Standards Updates

In August 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-12 Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”) to facilitate financial reporting that more closely reflects an entity’s risk management activities. This ASU better aligns an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The standard becomes effective for public entities beginning after December 15, 2018. ASU 2017-12 is not expected to have a material impact on the Company’s financial statements.

In March 2017, the FASB issued amendments to ASU 2017-08 Receivables –Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization of Purchased Callable Debt Securities. Under GAAP, premiums are generally amortized as an adjustment of yield over the contractual life of the instrument. The amendments in the Update shorten the amortization period for certain purchased callable debt securities held at a premium to the earliest call date. The standard becomes effective for public entities beginning after December 15, 2018. As early adoption of ASU 2017-08 was permitted, the Company adopted the standard in the first quarter of 2017. The election to adopt ASU 2017-08 early required any adjustments to be made as of January 1, 2017, the beginning of the annual period that includes the interim period of adoption. ASU 2017-08 had no material impact to the Company’s financial statements.

In March 2017, the FASB issued amendments to ASU 2017-07 Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension cost and Net Periodic Postretirement Benefit Cost. This Update was issued primarily to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost in the income statement. The standard becomes effective for public entities beginning after December 15, 2017. The Company does not expect this Update to have a material effect on its financial statements.

In January 2017, the FASB issued amendments to ASU 2017-04 Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This Update was issued to simplify how an entity is required to test goodwill impairment. Under amendments to this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The standard becomes effective for U.S, Securities and Exchange Commission (SEC) filers beginning after December 15, 2019. The Company does not expect this Update to have a material effect on its financial statements.

In January 2017, the FASB issued amendments to ASU 2017-01 Business Combinations (Topic 80): Clarifying the Definition of a Business. This Update was issued to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions of assets or businesses. The standard becomes effective for public entities beginning after December 15, 2017. The Company does not expect this Update 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.

NOTE 2. ACQUISITIONS

The Company has determined that the acquisition described below constitutes a business combination as defined in Accounting Standards Codification (ASC) Topic 805, Business Combinations. Accordingly, as of the date of the acquisitions, the Company recorded the assets acquired and liabilities assumed at fair value. The Company determined fair values in accordance with the guidance provided in ASC Topic 820, Fair Value Measurements. Fair value is established by discounting the expected future cash flows with a market discount rate for like maturity and risk instruments. The estimation of expected future cash flows requires significant assumptions about appropriate discount rates, expected future cash flows, market conditions and other future events. Actual results could differ materially. The Company made the determinations of fair value using the best information available at the time; however, the assumptions used are subject to change and, if changed, could have a material effect on the Company’s financial position and results of operations.

On February 24, 2017, the Bank completed its acquisition of two branches from Stearns Bank, N.A. (“Stearns”). In accordance with the Purchase and Assumption Agreement, dated October 19, 2016, by and between the Bank and Stearns (the “P&A Agreement”), the Bank acquired approximately $154.2 million of deposits, the bank facilities, and certain other assets. In consideration of the purchased assets and assumed liabilities, the Bank paid (1) the book value, or approximately $1.0 million, for the branch facilities and certain assets, and (2) a deposit premium of $5.7 million, equal to 3.65% of the average daily deposits for the 30- day period ending the tenth (10^th) business day prior to the acquisition. The following table summarizes the assets acquired and liabilities assumed at the date of acquisition and their initial fair values:

(Dollars in thousands)	As Recorded by Stearns		Fair Value Adjustments		As Recorded by the Company
Assets
Cash and cash equivalents	$	1,258	$	—	$	1,258
Loans		7		—		7
Premises and equipment		950		132		1,082
Core deposit intangible		—		1,650		1,650
Total assets acquired		2,215		1,782		3,997

Liabilities
Deposits:
Noninterest-bearing demand	$	16,032	$	—		16,032
Interest-bearing demand		40,525		—		40,525
Money market		15,368		—		15,368
Savings		7,717		—		7,717
Time deposits		73,480		1,062		74,542
Total deposits		153,122		1,062		154,184
Other liabilities		321		—		321
Total liabilities assumed		153,443		1,062		154,505
Excess of liabilities assumed over assets acquired	$	151,228	$	720	$	150,508
Cash received to settle the acquisition					$	145,492
Goodwill					$	5,016

Fair values are subject to refinement for a period not to exceed one year after the closing date of an acquisition as information relative to closing date fair values becomes available. In particular, the fair value of collateral dependent loans and real estate owned (REO) may change to the extent that the Company receives updated appraisals indicating changes in valuation assumptions at acquisition.

Pro forma disclosures are not significant and not meaningful.

On October 1, 2017, the Company completed its acquisition of Chattahoochee Bank of Georgia (“Chattahoochee”) located in Gainesville, Georgia, which was merged with and into Entegra Bank. The Company will continue to operate Chattahoochee’s offices as Chattahoochee Bank of Georgia until a system conversion is completed in March 2018.

The acquisition added approximately $176.2 million to the Company’s assets, including $159.0 million of loans, $11.9 million of goodwill, and $166.1 million of deposits.

NOTE 3. INVESTMENT SECURITIES

The following table presents the holdings of our trading account as of September 30, 2017 and December 31, 2016:

	September 30,		December 31,
	2017		2016
	(Dollars in thousands)

Mutual funds	$	5,840	$	5,211

The trading account is held in a Rabbi Trust and seeks to generate returns that will fund the cost of certain deferred compensation agreements. There were $0.4 million and $0.3 million of realized gains for the nine months ended September 30, 2017 and 2016, respectively.

The Company’s held-to-maturity (HTM) investment portfolio was transferred to available-for-sale (AFS) during the third quarter of 2016 in order to provide the Company more flexibility managing its investment portfolio. As a result of the transfer, the Company is prohibited from classifying any investment securities as HTM for two years from the date of the transfer.

On April 28, 2017, the Louisiana Office of Financial Institutions closed First NBC Bank and appointed the FDIC as receiver. The Bank owned $0.7 million par value of subordinated debt issued by the holding company of First NBC Bank with an unrealized loss of $79,000 prior to the impairment. The Company concluded the investment to be other than temporarily impaired. As such, the financial information for the nine months ended September 30, 2017 includes other than temporary impairment of $0.7 million before tax.

The amortized cost and estimated fair values of AFS securities as of September 30, 2017 and December 31, 2016 are summarized as follows:

	September 30, 2017
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(Dollars in thousands)

U.S. Treasury & Government Agencies	$	3,500	$	15	$	(2	)	$	3,513
Municipal Securities		145,382		606		(2,260	)		143,728
Mortgage-backed Securities - Guaranteed		163,193		261		(1,339	)		162,115
Mortgage-backed Securities - Non Guaranteed		64,802		279		(263	)		64,818
Collateralized Loan Obligations		5,564		1		—			5,565
Corporate bonds		20,505		411		(47	)		20,869
Mutual funds		626		—		(8	)		618
	$	403,572	$	1,573	$	(3,919	)	$	401,226

	December 31, 2016
			Gross		Gross			Estimated
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(Dollars in thousands)

U.S. Treasury & Government Agencies	$	14,577	$	46	$	(2	)	$	14,621
Municipal Securities		152,208		337		(5,774	)		146,771
Mortgage-backed Securities - Guaranteed		162,379		134		(2,332	)		160,181
Mortgage-backed Securities - Non Guaranteed		58,967		2		(1,213	)		57,756
Corporate bonds		18,354		171		(167	)		18,358
Mutual funds		616		—		(12	)		604
	$	407,101	$	690	$	(9,500	)	$	398,291

Information pertaining to securities with gross unrealized losses at September 30, 2017 and December 31, 2016, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

	September 30, 2017
	Less Than 12 Months				More Than 12 Months				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(Dollars in thousands)
Available-for-Sale:
U.S. Treasury & Government Agencies	$	998	$	2	$	—	$	—	$	998	$	2
Municipal Securities		42,896		516		53,018		1,744		95,914		2,260
Mortgage-backed Securities - Guaranteed		68,196		456		50,449		883		118,645		1,339
Mortgage-backed Securities - Non Guaranteed		31,027		192		8,574		71		39,601		263
Corporate bonds		2,657		47		—		—		2,657		47
Mutual funds		618		8		—		—		618		8
	$	146,392	$	1,221	$	112,041	$	2,698	$	258,433	$	3,919

	December 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)
Available-for-Sale:
U.S. Treasury & Government Agencies	$	1,000	$	2	$	—	$	—	$	1,000	$	2
Municipal Securities		122,468		5,759		331		15		122,799		5,774
Mortgage-backed Securities - Guaranteed		115,539		2,035		17,594		297		133,133		2,332
Mortgage-backed Securities - Non Guaranteed		54,555		1,213		—		—		54,555		1,213
Corporate bonds		6,741		167		—		—		6,741		167
Mutual funds		616		12		—		—		616		12
	$	300,919	$	9,188	$	17,925	$	312	$	318,844	$	9,500

Information pertaining to the number of securities with unrealized losses is detailed in the table below. The Company believes all unrealized losses as of September 30, 2017 and December 31, 2016 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.

	September 30, 2017
	Less Than 12 Months		More Than 12 Months		Total
U.S. Treasury & Government Agencies		1		—		1
Municipal Securities		41		38		79
Mortgage-backed Securities - Guaranteed		43		36		79
Mortgage-backed Securities - Non Guaranteed		17		6		23
Corporate bonds		3		—		3
Mutual funds		1		—		1
		106		80		186

	December 31, 2016
	Less Than 12 Months		More Than 12 Months		Total
U.S. Treasury & Government Agencies		1		—		1
Municipal Securities		129		1		130
Mortgage-backed Securities - Guaranteed		77		13		90
Mortgage-backed Securities - Non Guaranteed		24		1		25
Corporate bonds		8		—		8
Mutual funds		1		—		1
		240		15		255

At September 30, 2017, the Company held 186 investment securities that were in an unrealized loss position of which 80 had been in unrealized loss positions for over twelve months. Market changes in interest rates and credit spreads may result in temporary unrealized losses as market prices of securities fluctuate. The Company reviews its investment portfolio on a quarterly basis for indications of other than temporary impairment. The severity and duration of impairment and the likelihood of potential recovery of impairment is considered along with the intent and ability to hold any impaired security to maturity or recovery of carrying value. When reviewing the securities in loss positions, pricing is reviewed for deterioration, bond ratings are reviewed for downgrades, and credit enhancement levels are reviewed for erosion.

For the three and nine months ended September 30, 2017 and 2016 the Company received proceeds from sales of securities classified as AFS and corresponding gross realized gains and losses as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016
	(Dollars in thousands)				(Dollars in thousands)

Gross proceeds	$	55,474	$	39,619	$	92,316	$	115,328
Gross realized gains		229		407		352		1,139
Gross realized losses		253		—		333		34

The Company had securities pledged against deposits and borrowings of approximately $161.4 million and $237.1 million at September 30, 2017 and December 31, 2016, respectively.

The amortized cost and estimated fair value of investments in debt securities at September 30, 2017, 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.

	Available-for-Sale
	Amortized Cost		Fair Value
	(Dollars in thousands)

Less than 1 year	$	1,626	$	1,616
Over 1 year through 5 years		5,579		5,640
After 5 years through 10 years		23,349		23,664
Over 10 years		145,023		143,374
		175,577		174,294
Mortgage-backed securities		227,995		226,932

Total	$	403,572	$	401,226

NOTE 4. LOANS RECEIVABLE

Loans receivable as of September 30, 2017 and December 31, 2016 are summarized as follows:

	September 30,			December 31,
	2017			2016
	(Dollars in thousands)

Real estate mortgage loans:
One-to-four family residential	$	291,042		$	278,437
Commercial real estate		328,931			292,879
Home equity loans and lines of credit		47,687			50,334
Residential construction		20,391			18,531
Other construction and land		82,035			60,605
Total real estate loans		770,086			700,786

Commercial and industrial		44,097			41,306
Consumer		5,278			4,594
Total commercial and consumer		49,375			45,900

Loans receivable, gross		819,461			746,686

Less: Net deferred loan fees		(1,545	)		(923	)
Fair value discount		(487	)		(857	)
Unamortized premium		495			605
Unamortized discount		(890	)		(1,150	)

Loans receivable, net of deferred fees	$	817,034		$	744,361

The Bank had $215.0 million and $144.3 million of loans pledged as collateral to secure funding with the Federal Home Loan Bank of Atlanta (“FHLB”) at September 30, 2017 and December 31, 2016, respectively. The Bank also had $100.7 million and $89.1 million of loans pledged as collateral to secure funding with the Federal Reserve Bank (“FRB”) Discount Window at September 30, 2017 and December 31, 2016, respectively.

Included in loans receivable and other borrowings at September 30, 2017 are $3.6 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 individually purchased loans for the three and nine month periods ended September 30, 2017 and 2016:

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
(Dollars in thousands)	2017			2016			2017			2016

Discount on purchased loans, beginning of period	$	956		$	1,233		$	1,150		$	1,366
Accretion		(66	)		(5	)		(260	)		(138	)
Discount on purchased loans, end of period	$	890		$	1,228		$	890		$	1,228

The following table presents the activity related to the fair value discount on loans from business combinations for the three and nine month periods ended September 30, 2017 and 2016:

	For the Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands)	2017			2016			2017			2016

Fair value discount, beginning of period	$	704		$	840		$	857		$	72
Additional discount for acquisitions		—			132			—			1,092
Accretion		(217	)		(101	)		(370	)		(293	)
Fair value discount, end of period	$	487		$	871		$	487		$	871

NOTE 5. ALLOWANCE FOR LOAN LOSSES

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

	Three Months Ended September 30, 2017
	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	$	3,386	$	4,096		$	572		$	248		$	907		$	585		$	140		$	9,934
Provision		320		(80	)		236			(28	)		113			(5	)		(36	)		520
Charge-offs		—		(105	)		(266	)		—			(114	)		—			(18	)		(503	)
Recoveries		2		32			—			—			9			7			56			106
Ending balance	$	3,708	$	3,943		$	542		$	220		$	915		$	587		$	142		$	10,057


	Three Months Ended September 30, 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	$	2,679		$	3,379	$	887		$	175		$	1,064		$	530		$	226		$	8,940
Provision		(376	)		494		(137	)		(60	)		(95	)		79			195			100
Charge-offs		(19	)		—		(28	)		—			(44	)		(52	)		(146	)		(289	)
Recoveries		27			170		44			—			28			13			71			353
Ending balance	$	2,311		$	4,043	$	766		$	115		$	953		$	570		$	346		$	9,104

	Nine Months Ended September 30, 2017
	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	$	2,812		$	3,979		$	677		$	185	$	848		$	599		$	205		$	9,305
Provision		875			82			127			35		280			(34	)		(205	)		1,160
Charge-offs		(50	)		(193	)		(267	)		—		(289	)		—			(42	)		(841	)
Recoveries		71			75			5			—		76			22			184			433
Ending balance	$	3,708		$	3,943		$	542		$	220	$	915		$	587		$	142		$	10,057

	Nine Months Ended September 30, 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		(83	)		1,081			(351	)		(195	)		(78	)		(106	)		(168	)		100
Charge-offs		(117	)		(431	)		(158	)		—			(481	)		(62	)		(172	)		(1,421	)
Recoveries		56			172			178			32			112			135			279			964
Ending balance	$	2,311		$	4,043		$	766		$	115		$	953		$	570		$	346		$	9,104

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

	September 30, 2017
	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	$	206	$	65	$	—	$	—	$	51	$	16	$	—	$	338
Collectively evaluated for impairment		3,502		3,878		542		220		864		571		142		9,719
	$	3,708	$	3,943	$	542	$	220	$	915	$	587	$	142	$	10,057

Loans Receivable
Individually evaluated for impairment	$	4,118	$	5,813	$	313	$	—	$	1,303	$	293	$	—	$	11,840
Collectively evaluated for impairment		286,172		321,787		47,480		20,337		80,487		43,580		5,351		805,194
	$	290,290	$	327,600	$	47,793	$	20,337	$	81,790	$	43,873	$	5,351	$	817,034

	December 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	$	201	$	178	$	2	$	—	$	175	$	28	$	—	$	584
Collectively evaluated for impairment		2,611		3,801		675		185		673		571		205		8,721
	$	2,812	$	3,979	$	677	$	185	$	848	$	599	$	205	$	9,305

Loans Receivable
Individually evaluated for impairment	$	3,769	$	7,601	$	313	$	—	$	1,682	$	306	$	—	$	13,671
Collectively evaluated for impairment		273,169		284,502		50,087		18,439		58,444		41,397		4,652		730,690
	$	276,938	$	292,103	$	50,400	$	18,439	$	60,126	$	41,703	$	4,652	$	744,361

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.

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.

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.

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:

September 30, 2017

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	$	—	$	9,202	$	—	$	—	$	—	$	1,018	$	—	$	10,220
2		1,174		4,164		—		—		—		1,206		—		6,544
3		26,989		38,919		2,197		496		1,827		5,652		—		76,080
4		93,206		157,385		4,633		10,886		45,104		21,596		363		333,173
5		22,521		96,192		1,065		2,806		17,681		13,733		8		154,006
6		2,118		9,023		—		—		2,085		264		—		13,490
7		2,191		5,163		—		—		438		404		—		8,196
	$	148,199	$	320,048	$	7,895	$	14,188	$	67,135	$	43,873	$	371	$	601,709

Ungraded Loan Exposure:

Performing	$	140,609	$	7,552	$	39,819	$	6,149	$	14,538	$	—	$	4,933	$	213,600
Nonperforming		1,482		—		79		—		117		—		47		1,725
Subtotal	$	142,091	$	7,552	$	39,898	$	6,149	$	14,655	$	—	$	4,980	$	215,325

Total	$	290,290	$	327,600	$	47,793	$	20,337	$	81,790	$	43,873	$	5,351	$	817,034

December 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	$	—	$	10,203	$	—	$	—	$	—	$	431	$	—	$	10,634
2		—		4,287		—		—		—		1,465		—		5,752
3		27,975		24,626		1,814		586		2,164		2,803		—		59,968
4		75,246		130,857		3,363		10,646		22,293		21,942		51		264,398
5		26,306		95,408		3,476		2,347		17,930		11,344		324		157,135
6		2,587		11,501		—		284		2,470		270		—		17,112
7		1,713		6,686		—		—		869		421		—		9,689
	$	133,827	$	283,568	$	8,653	$	13,863	$	45,726	$	38,676	$	375	$	524,688

Ungraded Loan Exposure:

Performing	$	142,222	$	8,535	$	41,497	$	4,576	$	14,149	$	3,027	$	4,230	$	218,236
Nonperforming		889		—		250		—		251		—		47		1,437
Subtotal	$	143,111	$	8,535	$	41,747	$	4,576	$	14,400	$	3,027	$	4,277	$	219,673

Total	$	276,938	$	292,103	$	50,400	$	18,439	$	60,126	$	41,703	$	4,652	$	744,361

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.

	September 30, 2017
	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	$	2,250	$	616	$	1,471	$	4,337	$	285,953	$	290,290
Commercial real estate		2,596		179		719		3,494		324,106		327,600
Home equity and lines of credit		889		47		70		1,006		46,787		47,793
Residential construction		283		—		—		283		20,054		20,337
Other construction and land		178		50		126		354		81,436		81,790
Commercial		235		—		150		385		43,488		43,873
Consumer		29		5		42		76		5,275		5,351
Total	$	6,460	$	897	$	2,578	$	9,935	$	807,099	$	817,034

	December 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	$	4,917	$	1,108	$	427	$	6,452	$	270,486	$	276,938
Commercial real estate		1,382		1,800		1,638		4,820		287,283		292,103
Home equity and lines of credit		126		44		231		401		49,999		50,400
Residential construction		180		—		—		180		18,259		18,439
Other construction and land		468		—		794		1,262		58,864		60,126
Commercial		368		—		—		368		41,335		41,703
Consumer		62		1		—		63		4,589		4,652
Total	$	7,503	$	2,953	$	3,090	$	13,546	$	730,815	$	744,361

Impaired Loans

The following table presents investments in loans considered to be impaired and related information on those impaired loans as of September 30, 2017 and December 31, 2016.

	September 30, 2017						December 31, 2016
	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	$	3,006	$	3,122	$	—	$	2,625	$	2,723	$	—
Commercial real estate		4,142		6,170		—		5,526		7,710		—
Home equity and lines of credit		213		328		—		213		328		—
Residential construction		—		—		—		—		—		—
Other construction and land		579		682		—		771		911		—
Commercial		—		—		—		—		—		—
	$	7,940	$	10,302	$	—	$	9,135	$	11,672	$	—

Loans with a valuation allowance
One-to four-family residential	$	1,112	$	1,112	$	206	$	1,144	$	1,144	$	201
Commercial real estate		1,671		1,671		65		2,075		2,075		178
Home equity and lines of credit		100		100		—		100		100		2
Residential construction		—		—		—		—		—		—
Other construction and land		724		724		51		911		911		175
Commercial		293		293		16		306		306		28
	$	3,900	$	3,900	$	338	$	4,536	$	4,536	$	584

Total
One-to four-family residential	$	4,118	$	4,234	$	206	$	3,769	$	3,867	$	201
Commercial real estate		5,813		7,841		65		7,601		9,785		178
Home equity and lines of credit		313		428		—		313		428		2
Residential construction		—		—		—		—		—		—
Other construction and land		1,303		1,406		51		1,682		1,822		175
Commercial		293		293		16		306		306		28
	$	11,840	$	14,202	$	338	$	13,671	$	16,208	$	584

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 September 30,								Nine Months Ended September 30,
	2017				2016				2017				2016
	Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized
	(Dollars in thousands)								(Dollars in thousands)
Loans without a valuation allowance
One-to four-family residential	$	3,122	$	18	$	2,391	$	23	$	3,156	$	87	$	2,415	$	70
Commercial real estate		6,170		32		8,978		29		6,199		95		9,036		86
Home equity and lines of credit		328		13		328		2		328		37		328		7
Other construction and land		682		5		917		7		687		15		926		20
	$	10,302	$	68	$	12,614	$	61	$	10,370	$	234	$	12,705	$	183

Loans with a valuation allowance
One-to four-family residential	$	1,115	$	13	$	1,500	$	17	$	1,129	$	38	$	1,518	$	51
Commercial real estate		1,673		21		1,752		20		1,690		64		1,769		60
Home equity and lines of credit		100		2		100		1		100		4		100		3
Other construction and land		724		9		1,017		9		753		28		1,032		26
Commercial		294		5		307		4		301		16		313		14
	$	3,906	$	50	$	4,676	$	51	$	3,973	$	150	$	4,732	$	154

Total
One-to four-family residential	$	4,237	$	31	$	3,891	$	40	$	4,285	$	125	$	3,933	$	121
Commercial real estate		7,843		53		10,730		49		7,889		159		10,805		146
Home equity and lines of credit		428		15		428		3		428		41		428		10
Other construction and land		1,406		14		1,934		16		1,440		43		1,958		46
Commercial		294		5		307		4		301		16		313		14
	$	14,208	$	118	$	17,290	$	112	$	14,343	$	384	$	17,437	$	337

Nonperforming Loans

The following table summarizes the balances of nonperforming loans as of September 30, 2017 and December 31, 2016. Certain loans classified as Troubled Debt Restructurings (“TDRs”) and impaired loans may be on non-accrual status even though they are not contractually delinquent.

	September 30, 2017		December 31, 2016
	(Dollars in thousands)

One-to four-family residential	$	2,064	$	1,125
Commercial real estate		2,761		3,536
Home equity loans and lines of credit		79		250
Residential construction		—		—
Other construction and land		503		1,042
Commercial		150		41
Consumer		47		47
Non-performing loans	$	5,604	$	6,041

Troubled Debt Restructurings (TDR)

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

	September 30, 2017
	Performing		Nonperforming		Total
	TDR’s		TDR’s		TDR’s
	(Dollars in thousands)

One-to-four family residential	$	3,107	$	579	$	3,686
Commercial real estate		4,519		1,480		5,999
Home equity and lines of credit		313		—		313
Other construction and land		1,107		378		1,485
Commercial		293		—		293

	$	9,339	$	2,437	$	11,776

	December 31, 2016
	Performing		Nonperforming		Total
	TDR’s		TDR’s		TDR’s
	(Dollars in thousands)

One-to-four family residential	$	3,560	$	210	$	3,770
Commercial real estate		4,327		2,366		6,693
Home equity and lines of credit		313		—		313
Other construction and land		1,377		206		1,583
Commercial		305		—		305

	$	9,882	$	2,782	$	12,664

There were no loan modifications that were deemed TDRs at the time of the modification during the three and nine month periods ended September 30, 2017 or 2016.

There were no TDR’s that defaulted during the three and nine month periods ending September 30, 2017 or 2016 and which were modified as TDR’s within the previous 12 months.

NOTE 6. GOODWILL AND OTHER INTANGIBLES

The Company had $7.1 million and $2.1 million of goodwill as of September 30, 2017 and December 31, 2016, respectively. The following is a summary of changes in the carrying amounts of goodwill:

	As of and for the Nine Months Ending		As of and for the Year Ending
	September 30,		December 31,
	2017		2016
	Dollars in thousands
Balance at beginning of period	$	2,065	$	711
Additions:
Prior acquisitions measurement period adjustments		63		—
Goodwill from current year acquisitions		5,016		1,354
Balance at end of period	$	7,144	$	2,065

The Company’s other intangible assets consist of core deposit intangibles related to acquired core deposits. The following is a summary of gross carrying amounts and accumulated amortization of core deposit intangibles:

	As of and for the Nine Months Ending			As of and for the Year Ending
	September 30,			December 31,
	2017			2016
	Dollars in thousands
Gross balance at beginning of period	$	1,120		$	590
Additions from acquisitions		1,650			530
Gross balance at end of period		2,770			1,120
Less accumulated amortization		(399	)		(141	)
Core deposit intangible, net	$	2,371		$	979

Core deposit intangibles are amortized using the straight-line method over their estimated useful lives of seven years. Estimated amortization expense for core deposit intangibles for each of the next five years is approximately $0.4 million per year.

NOTE 7. DEPOSITS

The following table summarizes deposit balances and interest expense by type of deposit as of and for the nine months ended September 30, 2017 and 2016 and the year ended December 31, 2016.

	As of and for the								As of and for the Year Ended
	Nine Months Ended September 30,								December 31,
	2017				2016				2016
(Dollars in thousands)	Balance		Interest Expense		Balance		Interest Expense		Balance		Interest Expense
Noninterest-bearing demand	$	160,718	$	—	$	142,174	$	—	$	139,136	$	—
Interest-bearing demand		179,398		149		115,874		127		122,271		160
Money Market		261,901		703		240,990		548		239,387		770
Savings		50,827		39		38,476		38		40,014		49
Time Deposits		351,995		2,336		299,764		2,268		289,205		2,985
	$	1,004,839	$	3,227	$	837,278	$	2,981	$	830,013	$	3,964

NOTE 8. BORROWINGS

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

	September 30, 2017					December 31, 2016
Year of Maturity	Balance		Weighted Average Rate			Balance		Weighted Average Rate
	(Dollars in thousands)
2017	$	135,500		1.14	%	$	273,500		0.64	%
2018		95,000		1.30	%		25,000		1.17	%
2019		3,000		1.56	%		—		—
	$	233,500		1.21	%	$	298,500		0.68	%

On September 15, 2017, the Company established a $15.0 million revolving credit loan facility with NexBank SSB. The loan facility, which is secured by Entegra Bank stock, bears interest at LIBOR plus 350 basis points and is intended to be used for general corporate purposes. The Company had drawn $5.0 million on the revolving credit loan facility as of September 30, 2017.

NOTE 9. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposure to business and operational risks through management of its core business activities. The Company manages interest rate risk primarily by managing the amount, sources, and duration of its investment securities portfolio and borrowings and through the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Derivative financial instruments are used to manage differences in the amount, timing, and duration of known or expected cash receipts or payments principally related to loans and borrowings.

The table below presents the fair value of the Company’s derivative financial instruments as of the dates indicated as well as their classification on the consolidated balance sheet (in thousands).

		Fair Value
	Balance Sheet Location	September 30, 2017		December 31, 2016
Designated as hedges:
Cash flow hedge of borrowings - interest rate swap	Other assets	$	441	$	476
Total		$	441	$	476

Not designated as hedges:
Mortgage banking - loan commitment	Other assets	$	50	$	41
Mortgage banking - forward sales commitment	Other assets		22		19
Total		$	72	$	60

Mortgage banking - loan commitment	Other liabilities	$	—	$	—
Mortgage banking - forward sales commitment	Other liabilities		3	$	—
Total		$	3	$	—

Derivative contracts that are not accounted for as hedging instruments under ASC 815, Derivatives and Hedging, are related to the Company’s mortgage loan origination activities. Between the time that the Company enters into an interest-rate lock commitment to originate a mortgage loan that is to be held for sale and the time the loan is funded and eventually sold, the Company is subject to the risk of variability in market prices. The Company also enters into forward sale agreements to mitigate risk and to protect the expected gain on the eventual loan sale. This activity is on a matched basis, with a loan sale commitment hedging a specific loan. The commitments to originate mortgage loans and forward loan sales commitments are freestanding derivative instruments. The underlying loans are accounted for under the lower of cost or fair value method and are not reflected in the table above. Fair value adjustment on these derivative instruments are recorded within mortgage banking income in the Consolidated Statement of Income.

The Company’s objectives in using interest rate derivatives are to add stability to net interest revenue and to manage its exposure to interest rate movements. To accomplish this objective, the Company uses interest rate swaps as part of its interest rate risk management strategy. The structure of the swap agreements is described in the table below (dollars in thousands):

Underlyings	Designation	Notional	Payment Provision	Life of Swap Contract
Junior Subordinated Debt	Cash Flow Hedge	$ 14,000	Pay 0.958%/Receive 3 month LIBOR	4 yrs
FHLB Variable Rate Advance	Cash Flow Hedge	$ 15,000	Pay 1.054%/Receive 3 month LIBOR	2 yrs
FHLB Variable Rate Advance	Cash Flow Hedge	$ 20,500	Pay 1.354%/Receive 3 month LIBOR	2 yrs

The swap contracts involve the payment of fixed-rate amounts to a counterparty in exchange for the Company receiving variable-rate payments without exchange of the underlying notional amounts.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffectiveness of the cash flow hedge is recognized through earnings. There was no ineffectiveness during the three and nine months ended September 30, 2017 or 2016.

The table below presents the effect of the Company’s cash flow hedge on the Consolidated Statement of Income (in thousands).

	Amount of Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)				Gain (Loss) Reclassified from AOCI into Income (Effective Portion)
						For the three months ended September 30,					For the nine months ended September 30,
	September 30, 2017		December 31, 2016		Location	2017			2016		2017		2016
Interest rate swap	$	278	$	476	Interest Expense	$	(12	)	$	12	$	8	$	12

The Company is exposed to credit risk in the event of non-performance by the counterparties to its interest rate derivative agreements. The Company assesses the credit risk of its financial institution counterparties by monitoring publicly available credit rating and financial information. The Company manages dealer credit risk by entering into interest rate derivatives only with primary and highly rated counterparties, the use of ISDA master agreements and counterparty limits. The agreements contain collateral arrangements with the amount of collateral to be posted generally governed by the settlement value of outstanding swaps. The Company does not currently anticipate any losses from failure of interest rate derivative counterparties to honor their obligations.

The Company has agreements with its derivative counterparties that contain a provision in which if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, the Company could also be declared in default on its derivative obligations. Furthermore, certain agreements covering the Company’s derivative instruments contain provisions that require the Company to maintain its status as a well / adequately capitalized institution. These provisions enable the counterparties to the derivative instruments to request immediate payment or require the Company to post additional collateral.

NOTE 10. INCOME TAXES

The components of net deferred taxes as of September 30, 2017 and December 31, 2016 are summarized as follows:

	September 30,		December 31,
	2017		2016
	(Dollars in thousands)
Deferred tax assets:
Federal net operating loss	$	6,430	$	8,560
Allowance for loan losses		3,556		3,245
Deferred compensation and post employment benefits		3,286		3,365
State net operating loss		370		557
Valuation reserve for other real estate		486		693
Non-accrual interest		320		375
Loan basis differences		123		238
Unrealized losses on securities		702		3,079
Fixed Assets		30		—
Deposit premium		61		155
Other		2,011		1,380
Gross deferred tax assets		17,375		21,647

Deferred tax liabilities:
Fixed assets		—		263
Loan servicing rights		995		962
Deferred loan costs		1,163		1,002
Prepaid expenses		53		57
Core deposit intangible		124		158
Other		562		220
Total deferred tax liabilities		2,897		2,662

Net deferred tax asset	$	14,478	$	18,985

As of September 30, 2017 and December 31, 2016, $39 thousand and $0.2 million, respectively, 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 3 months.

The following table summarizes the amount and expiration dates of the Company’s unused net operating losses:

(Dollars in thousands)	Amount		Expiration Dates
Federal	$	18,372		2031-2034
North Carolina	$	20,174		2026-2027

NOTE 11. EARNINGS PER SHARE

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands, except per share amounts)	2017		2016		2017		2016
Numerator:
Net income	$	2,471	$	1,800	$	5,873	$	4,024
Denominator:
Weighted-average common shares outstanding - basic		6,458,679		6,466,375		6,460,015		6,483,535
Effect of dilutive securities:
Stock options		42,973		—		39,165		—
Restricted stock units		46,878		17,851		43,081		16,663
Weighted-average common shares outstanding - diluted		6,548,530		6,484,226		6,542,261		6,500,198

Earnings per share - basic	$	0.38	$	0.28	$	0.91	$	0.62
Earnings per share - diluted	$	0.38	$	0.28	$	0.90	$	0.62

At September 30, 2017, the Company had 9,000 potentially dilutive shares of common stock that were excluded from diluted earnings per share because their effect would be anti-dilutive. These potentially dilutive shares of common stock are issuable upon exercise of stock options granted to employees with a weighted average exercise price of $21.96.

At September 30, 2016, the Company had 411,500 potentially dilutive shares of common stock that were excluded from diluted earnings per share because their effect would be anti-dilutive. These potentially dilutive shares of common stock are issuable upon exercise of stock options granted to employees and directors with a weighted average exercise price of $18.42.

NOTE 12. ACCUMULATED 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 and nine months ended September 30, 2017 and 2016.

	Three Months Ended September 30, 2017
	Available for Sale Securities			Held to Maturity Securities Transferred from AFS			Deferred Tax Valuation Allowance on AFS			Cash Flow Hedge			Total
	(Dollars in thousands)
Balance, beginning of period	$	(2,108	)	$	—		$	(93	)	$	270		$	(1,931	)

Change in deferred tax valuation allowance attributable to net unrealized losses on investment securities available for sale		—			—			54			—			54
Change in net unrealized holding losses on securities available for sale		973			—			—			—			973
Reclassification adjustment for net securities gains realized in net income		24			—			—			—			24
Change in unrealized holding gains on cash flow hedge		—			—			—			25			25
Reclassification adjustment for cash flow hedge effectiveness		—			—			—			(12	)		(12	)
Income tax effect		(367	)		—			—			(5	)		(372	)

Balance, end of period	$	(1,478	)	$	—		$	(39	)	$	278		$	(1,239	)

	Three Months Ended September 30, 2016
	(Dollars in thousands)
Balance, beginning of period	$	3,030		$	(211	)	$	(284	)	$	(28	)	$	2,507

Change in deferred tax valuation allowance attributable to net unrealized losses on investment securities available for sale		—			—			33			—			33
Change in net unrealized holding losses on securities available for sale		(1,390	)		—			—			—			(1,390	)
Reclassification adjustment for net securities gains realized in net income		(407	)		—			—			—			(407	)
Amortization of unrealized gains and losses on securities transferred to held to maturity		—			324			—			—			324
Change in unrealized holding gains on cash flow hedge		—			—			—			83			83
Reclassification adjustment for cash flow hedge effectiveness		—			—			—			12			12
Income tax effect		696			(113	)		—			(35	)		548

Balance, end of period	$	1,929		$	—		$	(251	)	$	32		$	1,710

	Nine Months Ended September 30, 2017
	Available for Sale Securities			Held to Maturity Securities Transferred from AFS			Deferred Tax Valuation Allowance on AFS			Cash Flow Hedge			Total
	(Dollars in thousands)
Balance, beginning of period	$	(5,554	)	$	—		$	(202	)	$	300		$	(5,456	)

Change in deferred tax valuation allowance attributable to net unrealized losses on investment securities available for sale		—			—			163			—			163
Change in net unrealized holding losses on securities available for sale		6,404			—			—			—			6,404
Reclassification adjustment for net securities gains realized in net income		(19	)		—			—			—			(19	)
Reclassification adjustment for other than temporary impairment of securities available for sale		79			—			—			—			79
Change in unrealized holding gains on cash flow hedge		—			—			—			(43	)		(43	)
Reclassification adjustment for cash flow effectiveness		—			—			—			8			8
Income tax effect		(2,388	)		—			—			13			(2,375	)

Balance, end of period	$	(1,478	)	$	—		$	(39	)	$	278		$	(1,239	)

	Nine Months Ended September 30, 2016
	(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		—			—			328			—			328
Change in net unrealized holding losses on securities available for sale		5,115			—			—			—			5,115
Reclassification adjustment for net securities gains realized in net income		(1,105	)		—			—			—			(1,105	)
Amortization of unrealized gains and losses on securities transferred to held to maturity		—			894			—			—			894
Change in unrealized holding gains on cash flow hedge		—			—			—			38			38
Reclassification adjustment for cash flow effectiveness		—			—			—			12			12
Income tax effect		(1,487	)		(331	)		—			(18	)		(1,836	)

Balance, end of period	$	1,929		$	—		$	(251	)	$	32		$	1,710

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 September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2017			2016			2017			2016			Income Statement Line Item Affected
Available-for-sale securities
Gains recognized	$	(24	)	$	407		$	19		$	1,105		Gain on sale of investments, net of loss
Other than temporary impairment		—			—			(79	)		—		Other than temporary impairment of AFS securities
Income tax effect		9			(150	)		22			(408	)	Income tax expense
Reclassified out of AOCI, net of tax		(15	)		257			(38	)		697		Net income

Held-to-maturity securities
Amortization of unrealized losses		—			(13	)		—			(917	)	Interest income - taxable securities
Income tax effect		—			5			—			339		Income tax expense
Reclassified out of AOCI, net of tax		—			(8	)		—			(578	)	Net income

Cash flow hedge
Interest expense - effective portion		—			—			(28	)		—		Interest expense - FHLB advances
Interest expense - effective portion		12			(12	)		20			(12	)	Interest expense - Junior subordinated notes
Income tax effect		(4	)		4			3			4		Income tax expense
Reclassified out of AOCI, net of tax		8			(8	)		(5	)		(8	)	Net income

Deferred tax valuation allowance
Recognition of reversal of valuation allowance		(54	)		33			(163	)		328		Income tax expense

Total reclassified out of AOCI, net of tax	$	(61	)	$	274		$	(206	)	$	439		Net income

NOTE 13. 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:

	September 30, 2017
	(Dollars in thousands)
Lines of credit	$	114,872
Standby letters of credit		840

	$	115,712

As of September 30, 2017, the Company had outstanding commitments to originate loans as follows:

	September 30, 2017
	Amount		Range of Rates
	(Dollar in thousands)

Fixed	$	24,586		3.125% to 6.50%
Variable		13,560		3.75% to 7.00%

	$	38,146

The allowance for unfunded commitments was $0.1 million at September 30, 2017 and December 31, 2016.

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 September 30, 2017 and December 31, 2016.

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 14. FAIR VALUE DISCLOSURES

We use fair value measurements when recording and disclosing certain financial assets and liabilities. AFS securities, 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.

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:

Investment 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.

Also included in securities are corporate bonds which are valued using significant unobservable inputs and are classified as Level 2 or Level 3 based on market information available during the period.

Trading securities 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, forward sale commitments, and interest rate swaps. Interest rate lock commitments and forward sale commitments 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.

Interest rate swaps are valued by a third party using significant assumptions that are observable in the market and can be corroborated by market data. The Company classifies interest rate swaps as Level 2.

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.

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.

Small Business Investment Company Holdings

Small Business Investment Company holdings (SBIC) are carried at the lower of cost or fair value. From time to time impairment of SBIC is evident as a result of underlying financial review and a valuation allowance for other-than-temporary impairment is established. SBIC 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.

Other Borrowings

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.

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:

	September 30, 2017
	Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Trading account assets	$	5,840	$	—	$	—	$	5,840
Securities available for sale:
U.S. Treasury & Government Agencies		2,510		1,003		—		3,513
Municipal Securities		—		143,728		—		143,728
Mortgage-backed Securities - Guaranteed		—		162,115		—		162,115
Mortgage-backed Securities - Non Guaranteed		—		64,818		—		64,818
Collateralized Loan Obligations		—		5,565		—		5,565
Corporate bonds		—		19,817		1,052		20,869
Mutual funds		618		—		—		618
Total securities available for sale		3,128		397,046		1,052		401,226

Loan servicing rights		—		—		2,713		2,713
Derivative assets		—		441		—		441
Forward sales commitments		—		—		22		22
Interest rate lock commitments		—		—		50		50

Total assets	$	8,968	$	397,487	$	3,837	$	410,292

Forward sales commitments	$	—	$	—	$	3	$	3
Interest rate lock commitments		—		—		—		—

Total liabilities	$	—	$	—	$	3	$	3

	December 31, 2016
	Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Trading account assets	$	5,211	$	—	$	—	$	5,211
Securities available for sale:
U.S. Treasury & Government Agencies		2,514		12,107		—		14,621
Municipal Securities		—		146,771		—		146,771
Mortgage-backed Securities - Guaranteed		—		160,181		—		160,181
Mortgage-backed Securities - Non Guaranteed		—		57,756		—		57,756
Corporate bonds		—		16,214		2,144		18,358
Mutual funds		604		—		—		604
Total securities available for sale		3,118		393,029		2,144		398,291

Loan servicing rights		—		—		2,603		2,603
Derivative assets		—		476		—		476
Forward sales commitments		—		—		19		19
Interest rate lock commitments		—		—		41		41

Total assets	$	8,329	$	393,505	$	4,807	$	406,641

There were no liabilities measured at fair value on a recurring basis as of December 31, 2016.

The following table presents the changes in assets and liabilities measured at fair value on a recurring basis for which we have utilized Level 3 inputs to determine fair value:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
	(Dollars in thousands)						(Dollars in thousands)
Balance at beginning of period	$	3,836		$	2,510		$	4,807		$	2,390

Corporate bonds
Fair value adjustment		—			—			(4	)		—
Transfer to Level 2		—			—			(1,086	)		—
Transfer from Level 2		—			2,758			—			2,758

Loan servicing right activity, included in servicing income, net
Capitalization from loans sold		154			185			446			444
Fair value adjustment		(158	)		(150	)		(335	)		(362	)

Mortgage derivative gains(losses) included in other income		5			(38	)		9			35

Balance at end of period	$	3,837		$	5,265		$	3,837		$	5,265

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 September 30, 2017 or December 31, 2016.

	September 30, 2017
	Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Collateral dependent impaired loans:
One-to four family residential	$	—	$	—	$	2,553	$	2,553
Commercial real estate		—		—		4,111		4,111
Home equity loans and lines of credit		—		—		213		213
Other construction and land		—		—		579		579
Commercial		—		—		—		—

Real estate owned:
One-to-four family residential		—		—		25		25
Commercial real estate		—		—		644		644
Other construction and land		—		—		1,768		1,768

SBIC		—		—		3,090		3,090

Total assets	$	—	$	—	$	12,983	$	12,983

	December 31, 2016
	Level 1		Level 2		Level 3		Total
	(Dollars in thousands)
Collateral dependent impaired loans:
One-to-four family residential	$	—	$	—	$	2,205	$	2,205
Commercial real estate		—		—		6,329		6,329
Home equity loans and lines of credit		—		—		213		213
Other construction and land		—		—		809		809

Real estate owned:
One-to-four family residential		—		—		1,336		1,336
Commercial real estate		—		—		722		722
Other construction and land		—		—		2,168		2,168

SBIC		—		—		1,655		1,655

Total assets	$	—	$	—	$	15,437	$	15,437

There were no liabilities measured at fair value on a nonrecurring basis as of September 30, 2017 or December 31, 2016.

Impaired loans totaling $4.4 million at September 30, 2017 and $4.6 million at December 31, 2016, 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 September 30, 2017.

	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%
Corporate bonds	Discounted Cash Flows	Recent trade pricing	0% - 8%
Loan servicing rights	Discounted Cash Flows	Prepayment speed	5% - 35%
		Discount rate	12% - 14%
SBIC	Indicative value provided by fund	Current operations and financial condition	0% - 13%

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

	Carrying		Fair Value Measurements at September 30, 2017
(Dollars in thousands)	Amount		Total		Level 1		Level 2		Level 3
Assets:
Cash and equivalents	$	94,498	$	94,498	$	94,498	$	—	$	—
Trading securities		5,840		5,840		5,840		—		—
Securities available for sale		401,226		401,226		3,128		397,046		1,052
Loans held for sale		3,818		4,132		—		4,132		—
Loans receivable, net		817,034		809,564		—		—		809,564
Other investments, at cost		12,633		12,633		—		12,633		—
Interest receivable		5,436		5,436		—		5,436		—
Bank owned life insurance		31,950		31,950		—		31,950		—
Loan servicing rights		2,713		2,713		—		—		2,713
Forward sales commitments		22		22		—		—		22
Interest rate lock commitments		50		50		—		—		50
Derivative asset		441		441		—		441		—
SBIC investments		3,090		3,090		—		—		3,090

Liabilities:
Demand deposits	$	652,844	$	652,844	$	—	$	652,844	$	—
Time deposits		351,995		348,444		—		—		348,444
Federal Home Loan Bank advances		233,500		233,610		—		233,610		—
Junior subordinated debentures		14,433		14,433		—		14,433		—
Other borrowings		8,588		8,604		—		8,604		—
Accrued interest payable		910		910		—		910		—
Forward sales commitments		3		3		—		—		3

	Carrying		Fair Value Measurements at December 31, 2016
(Dollars in thousands)	Amount		Total		Level 1		Level 2		Level 3
Assets:
Cash and equivalents	$	43,294	$	43,294	$	43,294	$	—	$	—
Trading securities		5,211		5,211		5,211		—		—
Securities available for sale		398,291		398,291		3,118		393,029		2,144
Loans held for sale		4,584		5,093		—		5,093		—
Loans receivable, net		744,361		741,612		—		—		741,612
Other investments, at cost		15,261		15,261		—		15,261		—
Interest receivable		5,012		5,012		—		5,012		—
Bank owned life insurance		31,347		31,347		—		31,347		—
Loan servicing rights		2,603		2,603		—		—		2,603
Forward sales commitments		19		19		—		—		19
Interest rate lock commitments		41		41		—		—		41
Derivative asset		476		476		—		476		—
SBIC investments		1,655		1,655		—		—		1,655

Liabilities:
Demand deposits	$	540,808		540,808	$	—	$	540,808	$	—
Time deposits		289,205		286,611		—		—		286,611
Federal Home Loan Bank advances		298,500		298,667		—		298,667		—
Junior subordinated debentures		14,433		14,433		—		14,433		—
Other borrowings		2,725		2,907		—		2,907		—
Accrued interest payable		254		254		—		254		—

NOTE 15. 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. On February 24, 2017, the Company announced the extension of the stock repurchase program through February 23, 2018.

The following table summarizes repurchase activity for the nine months ended September 30, 2017.

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, 2017 to January 31, 2017		—	$	—		—		222,750
February 1, 2017 to February 28, 2017		—	$	—		—		222,750
March 1, 2017 to March 31, 2017		13,000	$	23.12		13,000		209,750
April 1, 2017 to June 30, 2017		—	$	—		—		209,750
July 1, 2017 to September 30, 2017		—	$	—		—		209,750
Total year-to-date 2017		13,000	$	23.12		13,000		209,750

NOTE 16. SUBSEQUENT EVENTS

The acquisition added approximately $176.2 million to the Company’s assets, including $159.0 million of loans, $11.9 million of goodwill, and $166.1 million of deposits.

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 does 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 value of our deferred tax asset could be significantly reduced if corporate tax rates in the U.S. decline or as a result of other changes in the U.S. corporate tax system;

We may not be able to utilize all of our deferred tax asset;

Our ability to realize our deferred tax asset and deduct certain future losses could be limited if we experience an ownership change as defined in the Code;

We may not be able to implement aspects of our growth strategy;

Future expansion involves risks;

New bank office facilities and other facilities may not be profitable;

Acquisition of assets and assumption of liabilities may expose us to intangible asset risk, which could impact our results of operations and financial condition;

The success of our growth strategy depends on our ability to identify and retain individuals with experience and relationships in the markets in which we intend to expand;

Our return on equity may be low until we are able to leverage the capital we received from the stock offering;

We may need additional access to capital, which we may be unable to obtain on attractive terms or at all;

Our estimate for losses in our loan portfolio may be inadequate, which would cause our results of operations and financial condition to be adversely affected;

Our commercial real estate loans generally carry greater credit risk than one-to-four family residential mortgage loans;

Our concentration of construction financing may expose us to a greater risk of loss and hurt our earnings and profitability;

Repayment of our commercial business loans is primarily dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may fluctuate in value;

Our level of home equity loans and lines of credit lending may expose us to increased credit risk;

We continue to hold and acquire other real estate, which has led to operating expenses and vulnerability to additional declines in real property values;

A significant portion of our loan portfolio is secured by real estate, and events that negatively impact the real estate market could hurt our business;

Concentration of collateral in our primary market area may increase the risk of increased non-performing assets;

Income from secondary mortgage market operations is volatile, and we may incur losses with respect to our secondary mortgage market operations that could negatively affect our earnings;

We rely on the mortgage secondary market for some of our liquidity;

Future changes in interest rates could reduce our profits;

Strong competition within our market areas may limit our growth and profitability;

Our stock-based benefit plan will increase our costs, which will reduce our income;

The implementation of stock-based benefit plans may dilute your ownership interest;

We are subject to extensive regulation and oversight, and, depending upon the findings and determinations of our regulatory authorities, we may be required to make adjustments to our business, operations or financial position and could become subject to formal or informal regulatory action;

Financial reform legislation enacted by Congress and resulting regulations have increased and are expected to continue to increase our costs of operations;

We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations;

We are subject to more stringent capital requirements, which may adversely impact our return on equity, require us to raise additional capital, or constrain us from paying dividends or repurchasing shares;

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

The fair value of our investments could decline;

Liquidity risk could impair our ability to fund operations and jeopardize our financial condition, results of operations and cash flows;

Changes in accounting standards could affect reported earnings;

We are subject to environmental liability risk associated with our lending activities;

A failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors and other service providers or other third parties, including as a result of cyber-attacks, could disrupt our businesses, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs, and cause losses;

We are party to various lawsuits incidental to our business. Litigation is subject to many uncertainties such that the expenses and ultimate exposure with respect to many of these matters cannot be ascertained;

Our stock price may be volatile, which could result in losses to our shareholders and litigation against us;

The trading volume in our common stock is lower than that of other larger companies; future sales of our stock by our shareholders or the perception that those sales could occur may cause our stock price to decline;

There may be future sales of additional common stock or preferred stock or other dilution of our equity, which may adversely affect the market price of our common stock;

We may issue additional debt and equity securities or securities convertible into equity securities, any of which may be senior to our common stock as to distributions and in the event of liquidation, which could negatively affect the value of our common stock;

Negative public opinion surrounding our company and the financial institutions industry generally could damage our reputation and adversely impact our earnings;

Severe weather, natural disasters, acts of war or terrorism, and other external events could significantly impact our business; 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.

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 September 30, 2017 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 September 30, 2017 and December 31, 2016, 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 throughout the western North Carolina counties of Buncombe, Cherokee, Haywood, Henderson, Jackson, Macon, Polk, and Transylvania, the Upstate South Carolina counties of Anderson, Greenville, Pickens, and Spartanburg and the northern Georgia county of Pickens. 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 October 1, 2017, the Company completed the acquisition of Chattahoochee Bank of Georgia (“Chattahoochee”). Pursuant to the Agreement and Plan of Merger and Reorganization dated June 26, 2017, Chattahoochee merged with and into Entegra Bank. Chattahoochee will continue to operate as Chattahoochee Bank of Georgia until a system conversion is completed in March 2018.

Shareholders of Chattahoochee received a combination of cash and stock having a value of $14.75 in exchange for each share of Chattahoochee’s common stock held immediately prior to the effective time of the merger. The aggregate merger consideration paid by the Company was approximately $35.3 million, which includes the cash-out of in-the-money stock options and warrants. The Company issued approximately 395,666 shares of common stock in connection with the merger. The acquisition added one branch in Gainesville, Georgia, a loan production office in Duluth, Georgia and added approximately $176.2 million in assets, $159.0 million in loans, $11.9 million of goodwill, and $166.1 million in deposits upon closing.

Strategic Plan

We continue to execute on our strategic plan which involves the following key components:

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 geographically contiguous to our current markets;

Building deposits in rural markets; and

Maximizing our capital leverage through organic and acquired asset growth

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.

Earnings Summary

Net income for the three months ended September 30, 2017 was $2.5 million compared to $1.8 million for the same period in 2016. The increase in net income for the three months ended September 30, 2017 was primarily the result of increases in net interest income of $1.4 million, partially offset by an increase in provision for loan losses of $0.4 million and increases in noninterest expense of $0.4 million.

Net interest income increased $1.4 million, or 16.0%, for the three months ended September 30, 2017 as compared to the same period in 2016 primarily as the result of increases in interest and fees on loans and interest income on securities of $0.8 million, or 8.9%, and $0.9 million, or 50.9%, respectively. Additionally, interest income on interest-earning deposits increased $0.2 million for the three months ended September 30, 2017 as compared to the same period in 2016. These increases were partially offset by increased interest expense on deposits of $0.1 million, or 10.6%, and increased interest expense related to Federal Home Loan Bank (FHLB) advances of $0.3 million, or 72.8%, due primarily to increased interest rates for the three months ended September 30, 2017 compared to the same period in 2016.

Noninterest income decreased slightly primarily as the result of decreases in mortgage banking activity and gains on sales of investments of $0.2 million and $0.4 million, respectively. These decreases were partially offset by increases in gains on sales of Small Business Administration (SBA) loans of $0.2 million, service charges on deposit accounts of $0.1 million, interchange fees of $0.1 million, and bank-owned life insurance (BOLI) of $0.1 million for the three months ending September 30, 2017 compared to the same period in 2016.

Noninterest expense increased $0.4 million for the three months ended September 30, 2017 as compared to the same period in 2016 primarily as the result of increases of $0.5 million and $45 thousand in compensation and employee benefits and net occupancy, respectively, related to the Stearns branch acquisition in February 2017 and $0.1 million in professional and advisory expense due primarily to tax related services and fees related to public reporting requirements. These increases were partially offset by decreases of $0.3 million in net cost of operation of real estate owned primarily attributable to $0.2 million in proceeds received related to a judgement settlement.

Net income for the nine months ended September 30, 2017 increased $1.9 million to $5.9 million compared to $4.0 million for the same period in 2016. The increase in net income for the nine months ended September 30, 2017 was primarily the result of increases in net interest income of $4.9 million and a decrease in income tax expense of $0.3 million, partially offset by an increase in the provision for loan losses of $1.1 million, decreases in noninterest income of $1.0 million, and increases in noninterest expense of $1.2 million.

Net interest income increased $4.9 million, or 19.4%, for the nine months ended September 30, 2017 as compared to the same period in 2016 primarily as the result of increases in interest and fees on loans and interest income on securities of $2.8 million, or 11.7%, and $2.7 million, or 52.6%, respectively. These increases were partially offset by increased interest expense on deposits of $0.2 million, or 8.3%, and interest expense related to FHLB advances of $0.7 million, or 77.5%, due to increased advance levels for the nine months ended September 30, 2017 compared to the same period in 2016.

Noninterest income decreased $1.0 million, or 16.8%, for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 due primarily to other than temporary impairment of available-for-sale (AFS) securities totaling $0.7 million, reduced gains on sales of investments and SBA loans of $1.0 million and $0.3 million, respectively. These decreases were partially offset by increases in service charges on deposit accounts of $0.1 million, trading securities gains of $0.2 million, interchange fees of $0.3 million, BOLI income of $0.3 million, and income from Small Business Investment Companies holdings of $0.1 million included in other noninterest income.

Noninterest expense increased $1.3 million, or 5.1%, for the nine months ended September 30, 2017 compared to the same period in 2016. The increase in noninterest expense was primarily related to increased compensation and employee benefits of $2.1 million, increased net occupancy expense of $0.3 million and increased data processing expense of $0.1 million for the nine months ended 2017 compared to the nine months ended September 30, 2016 as the Company successfully grew its branch network during 2016 and 2017. Professional and advisory expense increased $0.2 million for the nine months ended 2017 compared to the same period in 2016 primarily as the result of increased tax related services and fees related to public reporting requirements. Merger-related expenses decreased $1.1 million for the nine months ended September 30, 2017 compared to the same period in 2016 as the result of a core processor termination fee in 2016 related to the Old Town Bank acquisition. The decrease in net cost of operation of real estate of $0.6 million related to lower levels of real estate owned and insurance proceeds in a judgement settlement was partially offset by increases in loan related expenses included in other noninterest expense.

The provision for loan losses was $1.2 million for the nine months ended September 30, 2017, compared to $0.1 million of provision for loan losses for the same period in 2016. The Company continues to experience modest levels of net charge-offs and non-performing loans.

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 as 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.

We analyze our noninterest expense and net income on a non-GAAP basis as detailed in the table below:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
	(Dollars in thousands, except per share data)
Core Noninterest Expense
Noninterest expense (GAAP)	$	8,218		$	7,842		$	25,692		$	24,434
Merger-related expenses		(116	)		(107	)		(972	)		(2,023	)
Core noninterest expense (Non-GAAP)	$	8,102		$	7,735		$	24,720		$	22,411

Core Net Income
Net income (GAAP)	$	2,471		$	1,800		$	5,873		$	4,024
Loss (gain) on sale of investments		16			(265	)		(12	)		(718	)
Other than temporary impairment of investment securities available for sale		—			—			455			—
Merger-related expenses		76			70			632			1,315
Core net income (Non-GAAP)	$	2,562		$	1,605		$	6,948		$	4,621

Core Diluted Earnings Per Share
Diluted earnings per share (GAAP)	$	0.38		$	0.28		$	0.90		$	0.62
Gain on sale of investments		—			(0.04	)		—			(0.11	)
Other than temporary impairment of investment securities available for sale		—			—			0.06			—
Merger-related expenses		0.01			0.01			0.10			0.20
Core diluted earnings per share (Non-GAAP)	$	0.39		$	0.25		$	1.06		$	0.71

Core Return on Average Assets
Return on Average Assets (GAAP)		0.71	%		0.60	%		0.57	%		0.47	%
Gain on sale of investments		—			-0.09	%		—			—
Other than temporary impairment of investment securities available for sale		—			—			0.04	%		—
Merger-related expenses		0.02	%		0.03	%		0.06	%		0.16	%
Core Return on Average Assets (Non-GAAP)		0.73	%		0.54	%		0.67	%		0.63	%

Core Return on Tangible Average Equity
Return on Average Equity (GAAP)		6.95	%		5.21	%		5.66	%		3.97	%
Loss (gain) on sale of investments		0.04	%		-0.77	%		-0.01	%		-0.71	%
Other than temporary impairment of investment securities available for sale		—			—			0.43	%		—
Merger-related expenses		0.21	%		0.20	%		0.61	%		1.30	%
Effect of goodwill and intangibles		0.52	%		0.10	%		0.43	%		0.09	%
Core Return on Average Tangible Equity (Non-GAAP)		7.72	%		4.75	%		7.12	%		4.65	%

Core Efficiency Ratio
Efficiency ratio (GAAP)		66.62	%		71.53	%		73.01	%		78.04	%
Gain (loss) on sale of investments		-0.19	%		2.72	%		0.05	%		2.62	%
Other than temporary impairment of investment securities available for sale		—			—			-1.38	%		—
Merger-related expenses		-0.88	%		-0.97	%		-2.76	%		-6.46	%
Core Efficiency Ratio (Non-GAAP)		65.55	%		73.28	%		68.92	%		74.20	%

	As Of
	September 30, 2017			December 31, 2016
	(Dollars in thousands, except share data)
Tangible Book Value Per Share
Book Value (GAAP)	$	143,525		$	133,068
Goodwill and intangibles		(9,516	)		(3,044	)
Book Value (Tangible)	$	134,009		$	130,024
Outstanding shares		6,458,679			6,467,550
Tangible Book Value Per Share	$	20.75		$	20.10

Financial Condition at September 30, 2017 and December 31, 2016

Total assets increased $126.9 million, or 9.8%, to $1.42 billion at September 30, 2017 from $1.29 billion at December 31, 2016. This increase in assets was comprised primarily of increases in cash and cash equivalents of $51.2 million, to $94.5 million at September 30, 2017 compared to $43.3 million at December 31, 2016 and loans, which increased $72.7 million, or 9.8%. The increase in loans was funded by cash from the deposits assumed in February 2017. On February 24, 2017, the Bank completed its acquisition of two branches from Stearns Bank, N.A. (Stearns). Deposits assumed in the branch acquisition totaled $79.6 million of core deposits and $74.5 million of certificates of deposits. Core deposits remained unchanged at 65% of the Company’s deposit portfolio at September 30, 2017 and December 31, 2016.

Total liabilities increased $116.5 million, or 10.0%, to $1.28 billion at September 30, 2017 from $1.16 billion at December 31, 2016, due primarily to the $174.8 million increase in deposits partially offset by the $65.0 million decrease in FHLB advances. The Company also drew $5.0 million on a revolving line of credit in connection with the aforementioned acquisition of Chattahoochee, which closed on October 1, 2017.

Total equity increased $10.5 million, or 7.9%, to $143.5 million at September 30, 2017 from $133.1 million at December 31, 2016. This increase was the result of $5.9 million of net income, $0.7 million of stock-based compensation expense, and a $4.2 million improvement in other comprehensive income, partially offset by $0.3 million of share repurchases.

Cash and Cash Equivalents

Total cash and cash equivalents increased $51.2 million to $94.5 million at September 30, 2017 from $43.3 million at December 31, 2016 primarily as a result of cash received in the settlement of the branch acquisition. Increased cash levels were maintained in preparation for the acquisition of Chattahoochee, which closed on October 1, 2017.

Investment Securities

The Company funded a trading account which is held in a Rabbi Trust that seeks to generate returns that will fund the cost of certain deferred compensation agreements.

The following table presents the holdings of our trading account as of September 30, 2017 and December 31, 2016:

	September 30, 2017		December 31, 2016
	(Dollars in thousands)

Exchange traded mutual funds	$	5,840	$	5,211
	$	5,840	$	5,211

The remainder of our investment securities portfolio is classified as AFS and is carried at fair value. The Company’s held-to-maturity (HTM) investment portfolio was transferred to AFS during the third quarter of 2016 in order to provide the Company more flexibility managing its investment portfolio. As a result of the transfer, the Company is prohibited from classifying any investment securities as HTM for two years from the date of the transfer.

The following table shows the amortized cost and fair value for our AFS investment portfolio as of the dates indicated.

	September 30,				December 31,
	2017				2016
	Amortized Cost		Fair value		Amortized Cost		Fair value
	(Dollars in thousands)
Investment securities available-for-sale:

U.S. Treasury & Government Agencies	$	3,500	$	3,513	$	14,577	$	14,620
Municipal Securities		145,382		143,728		152,208		146,771
Mortgage-backed Securities - Guaranteed		163,193		162,115		162,379		160,181
Mortgage-backed Securities - Non Guaranteed		64,802		64,818		58,967		57,756
Collateralized Loan Obligations		5,564		5,565		—		—
Corporate bonds		20,505		20,869		18,354		18,359
Mutual funds		626		618		616		604
Total securities available-for-sale	$	403,572	$	401,226	$	407,101	$	398,291

AFS investment securities increased $2.9 million to $401.2 million at September 30, 2017 from $398.3 million at December 31, 2016. We continue to monitor and decrease our investment portfolio as we continue to build our loan portfolio.

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.

	September 30,						December 31,
	2017						2016
	Amount			Percent			Amount			Percent
	(Dollars in thousands)
Real estate loans:
One-to-four family residential	$	291,042			35.5	%	$	278,437			37.3	%
Commercial		328,931			40.1			292,879			39.2
Home equity loans and lines of credit		47,687			5.8			50,334			6.7
Residential construction		20,391			2.5			18,531			2.5
Other construction and land		82,035			10.0			60,605			8.1
Commercial		44,097			5.4			41,306			5.5
Consumer		5,278			0.7			4,594			0.7
Total loans, gross	$	819,461			100.0	%	$	746,686			100.0	%

Less:
Deferred loan fees, net		(1,545	)					(923	)
Fair value discount		(487	)					(857	)
Unamortized premium		495						605
Unamortized discount		(890	)					(1,150	)

Total loans, net	$	817,034					$	744,361

Percentage of total assets		54.7	%					57.6	%

Net loans increased $72.7 million, or 9.8%, to $817.0 million at September 30, 2017 from $744.4 million at December 31, 2016. Most of our loan growth is concentrated in commercial real estate and other construction and land with increases of $36.1 million, or 9.2%, and $21.4 million, or 35.4%, respectively, at September 30, 2017, as compared to relative balances at December 31, 2016. We believe that economic conditions in our primary market areas are favorable and present opportunities for continued growth.

Delinquent Loans

When a loan becomes 15 days past due, we contact the borrower to inquire as to the status of the loan payment. 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.

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 troubled debt restructuring (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 September 30, 2017 or December 31, 2016.

	Delinquent loans
	30-59 Days			60-89 Days			90 Days and over			Total
	(Dollars in thousands)
September 30, 2017
Real estate loans:
One-to-four family residential	$	2,250		$	616		$	1,471		$	4,337
Commercial		2,596			179			719			3,494
Home equity loans and lines of credit		889			47			70			1,006
Residential construction		283			—			—			283
Other construction and land		178			50			126			354
Commercial		235			—			150			385
Consumer		29			5			42			76
Total delinquent loans	$	6,460		$	897		$	2,578		$	9,935
% of total loans, net		0.79	%		0.11	%		0.32	%		1.22	%

December 31, 2016
Real estate loans:
One-to-four family residential	$	4,917		$	1,108		$	427		$	6,452
Commercial		1,382			1,800			1,638			4,820
Home equity loans and lines of credit		126			44			231			401
One- to four-family residential construction		180			—			—			180
Other construction and land		468			—			794			1,262
Commercial		368			—			—			368
Consumer		62			1			—			63
Total delinquent loans	$	7,503		$	2,953		$	3,090		$	13,546
% of total loans, net		1.01	%		0.40	%		0.42	%		1.82	%

Delinquent loans decreased $3.6 million, or 26.7%, to $9.9 million at September 30, 2017 from $13.5 million at December 31, 2016. The decrease in delinquencies was due primarily to collection efforts and the favorable resolution of several large relationships.

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 real estate owned (REO). The table below sets forth the amounts and categories of our non-performing assets at the dates indicated.

	September 30,			December 31,
	2017			2016
	(Dollars in thousands)
Non-accrual loans:
Real estate loans:
One-to-four family residential	$	2,064		$	1,125
Commercial		2,761			3,536
Home equity loans and lines of credit		79			250
Residential construction		—			—
Other construction and land		503			1,042
Commercial		150			41
Consumer		47			47

Total non-performing loans		5,604			6,041

REO:
One-to-four family residential		25			1,336
Commercial real estate		644			722
Other construction and land		1,768			2,168

Total foreclosed real estate		2,437			4,226

Total non-performing assets	$	8,041		$	10,267

Troubled debt restructurings still accruing	$	9,339		$	9,882

Ratios:
Non-performing loans to total loans		0.69	%		0.81	%
Non-performing assets to total assets		0.57	%		0.79	%

Non-performing loans decreased $0.4 million, or 7.2%, to $5.6 million at September 30, 2017 from $6.0 million at December 31, 2016. The decrease in non-performing loans was primarily attributable to payoffs.

REO decreased $1.8 million, or 42.3%, to $2.4 million at September 30, 2017 from $4.2 million at December 31, 2016 primarily as a result of the successful liquidation of two large properties.

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.

	September 30,			December 31,
	2017			2016
	(Dollars in thousands)

Classified loans:
Substandard	$	9,921		$	11,126
Doubtful		—			—
Loss		—			—

Total classified loans:		9,921			11,126
As a % of total loans, net		1.21	%		1.48	%

Special mention		13,490			17,112

Total criticized loans	$	23,411		$	28,238
As a % of total loans, net		2.87	%		3.79	%

Total classified loans decreased $1.2 million, or 10.8%, to $9.9 million at September 30, 2017 from $11.1 million at December 31, 2016. Total criticized loans decreased $4.8 million, or 17.1%, to $23.4 million at September 30, 2017 from $28.2 million at December 31, 2016. Management continues to dedicate 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. The loss rates for the base loss reserve are segmented into 13 loan categories and contain loss rates ranging from approximately 0.5% to 3.0%.

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, home sales and prices, and a regional economic index.
	•		Lender risk – personnel changes

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 September 30,						As of or for the Nine Months Ended September 30,
	2017			2016			2017			2016
	(Dollars in thousands)						(Dollars in thousands)
Balance at beginning of period	$	9,934		$	8,940		$	9,305		$	9,461

Charge-offs:
Real Estate:
One- to four-family residential		—			19			50			117
Commercial		105			—			193			431
Home equity loans and lines of credit		266			28			267			158
Residential construction		—			—			—			—
Other construction and land		114			44			289			481
Commercial		—			52			—			62
Consumer		18			146			42			172
Total charge-offs		503			289			841			1,421

Recoveries:
Real Estate:
One- to four-family residential		2			27			71			56
Commercial		32			170			75			172
Home equity loans and lines of credit		—			44			5			178
Residential construction		—			—			—			32
Other construction and land		9			28			76			112
Commercial		7			13			22			135
Consumer		56			71			184			279
Total recoveries		106			353			433			964

Net charge-offs (recoveries)		397			(64	)		408			457

Provision for loan losses		520			100			1,160			100

Balance at end of period	$	10,057		$	9,104		$	10,057		$	9,104

Ratios:
Net charge-offs to average loans outstanding		0.20	%		(0.03	)%		0.07	%		0.09	%
Allowance to non-performing loans at period end		179.46	%		127.67	%		179.46	%		127.67	%
Allowance to total loans at period end		1.23	%		1.25	%		1.23	%		1.25	%

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 increased to 179.46% at September 30, 2017 compared to 156.03% at December 31, 2016 and 127.67% at September 30, 2016.

REO

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

	September 30,		December 31,
	2017		2016
	(Dollars in thousands)

One- to four-family residential	$	25	$	1,336
Commercial real estate		644		722
Residential construction		—		—
Other construction and land		1,768		2,168
Total	$	2,437	$	4,226

	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
	(Dollars in thousands)						(Dollars in thousands)
Balance, beginning of period	$	2,487		$	5,413		$	4,226		$	5,369
Additions		465			25			702			1,621
Disposals		(515	)		(747	)		(2,324	)		(1,791	)
Writedowns		—			(67	)		(167	)		(575	)
Balance, end of period	$	2,437		$	4,624		$	2,437		$	4,624

Real estate owned decreased $1.8 million, or 42.3%, to $2.4 million at September 30, 2017 from $4.2 million at December 31, 2016. We have experienced a significant decrease in the number and dollar amount of additions to REO, and have had 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 $4.5 million, or 23.7%, to $14.5 million at September 30, 2017 compared to $19.0 million at December 31, 2016. 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.

Deposits

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

	September 30, 2017					December 31, 2016
	Balance		Percent			Balance		Percent
	(Dollars in thousands)
Deposit type:
Noninterest-bearing demand accounts	$	160,718		15.9	%	$	139,136		16.8	%
Interest-bearing demand accounts		179,398		17.9			122,271		14.7
Money market accounts		261,901		26.1			239,387		28.8
Savings accounts		50,827		5.1			40,014		4.8
Time deposits		351,995		35.0			289,205		34.8

Total deposits	$	1,004,839		100.0	%	$	830,013		100.0	%

Core deposits increased $112.0 million, or 20.7%, to $652.8 million at September 30, 2017 from $540.8 million at December 31, 2016, including $79.6 million of core deposits assumed in the Stearns branch acquisition. Certificates of deposits increased $62.8 million, or 21.7%, to $352.0 million at September 30, 2017 from $289.2 million at December 31, 2016, primarily as the result of certificates of deposits assumed from Stearns. Core deposits remained unchanged at 65% of the Company’s deposit portfolio at September 30, 2017 and December 31, 2016.

FHLB Advances

FHLB advances decreased $65.0 million, or 21.8%, to $233.5 million at September 30, 2017 compared to $298.5 million at December 31, 2016. Funds received from the Stearns branch acquisition were used to pay off certain short-term advances as they matured. The advances had a weighted average rate of 1.21% as of September 30, 2017 compared to 0.68% at December 31, 2016. To manage our exposure to interest rate movement, we entered into two interest rate swaps on FHLB advances during 2016. The swap contracts involve the payment of fixed-rate amounts to a counterparty in exchange for our receipt of variable-rate payments over the two year lives of the contracts. The effective interest rates of the swapped advances were 0.96% and 1.31% at September 30, 2017.

Other Borrowings

On September 15, 2017, the Company established a $15.0 million revolving credit loan facility with NexBank SSB. The loan facility, which is secured by Entegra Bank stock, bears interest at LIBOR plus 350 basis points and is intended to be used for general corporate purposes. Unless extended, the loan will mature on September 15, 2020. The Company had drawn $5.0 million on the revolving credit loan facility as of September 30, 2017.

Junior Subordinated Notes

We had $14.4 million in junior subordinated notes outstanding at September 30, 2017 and December 31, 2016 payable to an unconsolidated subsidiary. These notes accrue interest at 2.80% above the 90-day LIBOR, adjusted quarterly. To add stability to net interest income and manage our exposure to interest rate movement, we entered into an interest rate swap in September 2016 on the junior subordinated notes. The swap contract involves the payment of fixed-rate amounts to a counterparty in exchange for our receipt of variable-rate payments over the four year life of the contract. The effective interest rate on the swapped notes was 3.86% and 3.76% at September 30, 2017 and December 31, 2016, respectively.

Equity

Total equity increased $10.5 million, or 7.9%, to $143.5 million at September 30, 2017 from $133.1 million at December 31, 2016. This increase was primarily attributable to $5.9 million of net income, $0.7 million of stock-based compensation expense, and a $4.2 million improvement in other comprehensive income partially offset by $0.3 million of share repurchases.

Comparison of Operating Results for the Three Months Ended September 30, 2017 and September 30, 2016.

General. Net income for the three months ended September 30, 2017 was $2.5 million compared to $1.8 million for the same period in 2016. The increase in net income for the recent quarter was primarily the result of increases in net interest income of $1.4 million, partially offset by an increase in provision for loan losses of $0.4 million and increases in noninterest expense of $0.4 million.

Net Interest Income. Net interest income increased $1.4 million for the three months ended September 30, 2017 compared to the same period in 2016. The increase in net interest income for the period was primarily the result of increases in interest and fee income on loans of $0.8 million, interest on securities of $0.9 million, and interest on interest-bearing deposits of $0.2 million. These increases in interest income were partially offset by increases in interest expense on deposits and FHLB advances of $0.1 million and $0.3 million, respectively.

The tax-equivalent net interest margin increased slightly to 3.30% for the three months ended September 30, 2017 compared to 3.29% for the same period in 2016. The increase in margin was primarily the result of increased yields on investments and loans, partially offset by increases in rates on FHLB advance.

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.

	For the Three Months Ended September 30,
	2017								2016
	Average Outstanding Balance			Interest		Yield/ Rate			Average Outstanding Balance			Interest		Yield/ Rate
	(Dollars in thousands)
Interest-earning assets:
Loans, including loans held for sale	$	788,021		$	9,175		4.62	%	$	714,665		$	8,424		4.68	%
Loans, tax exempt (1)		16,607			151		3.60	%		16,232			152		3.72	%
Investments - taxable		295,516			1,787		2.42	%		248,171			1,294		2.09	%
Investment tax exempt (1)		124,016			1,257		4.05	%		71,323			664		3.73	%
Interest earning deposits		63,262			216		1.35	%		46,582			62		0.53	%
Other investments, at cost		11,822			161		5.40	%		10,415			132		5.03	%

Total interest-earning assets		1,299,244			12,747		3.89	%		1,107,388			10,728		3.84	%

Noninterest-earning assets		100,731								86,098

Total assets	$	1,399,975							$	1,193,486

Interest-bearing liabilities:
Savings accounts	$	49,146		$	14		0.11	%	$	37,847		$	12		0.13	%
Time deposits		358,327			796		0.88	%		304,406			745		0.97	%
Money market accounts		260,804			248		0.38	%		238,923			217		0.36	%
Interest bearing transaction accounts		174,945			56		0.13	%		115,372			33		0.11	%
Total interest bearing deposits		843,222			1,114		0.52	%		696,548			1,007		0.57	%

FHLB advances		223,826			641		1.14	%		193,826			371		0.76	%
Junior subordinated debentures		14,433			140		3.85	%		14,433			140		3.85	%
Other borrowings		3,652			36		3.91	%		2,680			29		4.29	%

Total interest-bearing liabilities		1,085,133			1,931		0.71	%		907,487			1,547		0.68	%

Noninterest-bearing deposits		157,870								133,268

Other non interest bearing liabilities		14,667								14,627

Total liabilities		1,257,670								1,055,382
Total equity		142,305								138,104

Total liabilities and equity	$	1,399,975							$	1,193,486

Tax-equivalent net interest income				$	10,816							$	9,181

Net interest-earning assets ⁽²⁾	$	214,111							$	199,901

Average interest-earning assets to interest-bearing liabilities		1.20	%							1.22	%

Tax-equivalent net interest rate spread ⁽³⁾							3.19	%							3.17	%
Tax-equivalent net interest margin ⁽⁴⁾							3.30	%							3.29	%

(1) Tax exempt loans and investments are calculated giving effect to a 35% 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.

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 September 30, 2017 Compared to the Three Months Ended September 30, 2016
	Increase (decrease) due to:
	Volume		Rate			Total
	(Dollars in thousands)
Interest-earning assets:
Loans, including loans held for sale (1)	$	860	$	(109	)	$	751
Loans, tax exempt (2)		4		(5	)		(1	)
Investment - taxable		270		223			493
Investments - tax exempt (2)		531		62			593
Interest-earning deposits		29		125			154
Other investments, at cost		19		10			29

Total interest-earning assets		1,713		306			2,019

Interest-bearing liabilities:
Savings accounts	$	4	$	(2	)	$	2
Time deposits		124		(73	)		51
Money market accounts		19		12			31
Interest bearing transaction accounts		17		6			23
FHLB advances		63		207			270
Junior subordinated debentures		—		—			—
Other borrowings		10		(3	)		7

Total interest-bearing liabilities		237		147			384

Change in tax-equivalent net interest income	$	1,476	$	159		$	1,635

(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 $10.3 million for the three months ended September 30, 2017, compared to $8.9 million for the same period in 2016. As indicated in the table above, an increase in net interest income of $1.5 million attributable to an improvement in volume was supplemented by a $0.2 million improvement in net interest income earned attributable to an improvement in rates.

The increase in tax-equivalent net interest income of $1.5 million related to volume was primarily the result of higher average loan balances which increased $73.7 million and investment balances which increased $100.0 million for the three months ended September 30, 2017 as compared to the same period in 2016. The increase in average loan and investment balances was partially offset by higher average deposit and FHLB advance balances which increased $146.7 million and $30.0 million, respectively, over the same periods. While the average deposit growth was primarily attributable to the Stearns branch acquisition, the increase in average FHLB advances was a result of a leverage strategy to fund investment purchases.

The increase in tax-equivalent net interest income of $0.2 million related to rate was primarily the result of increased yields on investments and interest bearing deposit and decreased time deposit rates, partially offset by decreased loan yields and increased FHLB advance rates.

Our tax-equivalent net interest rate spread increased to 3.19% for the three months ended September 30, 2017 compared to 3.17% for the three months ended September 30, 2016, and our tax-equivalent net interest margin increased to 3.30% for the three months ended September 30, 2017, compared to 3.29% for the three months ended September 30, 2016. The increases in our interest rate spread and margin were primarily a result of decreased rates on our interest bearing deposits and increases in investment yields.

Provision for Loan Losses. We recorded a provision for loan losses for the three months ended September 30, 2017 of $0.5 million due to loan growth compared to a $0.1 million provision for loan losses for the same period in 2016. We are experiencing continued stabilization in asset quality, low 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 September 30, 2017 and 2016:

	Three Months Ended September 30,
	2017			2016		Change
	(Dollars in thousands)
Servicing income, net	$	59		$	72	$	(13	)
Mortgage banking		207			387		(180	)
Gain on sale of SBA loans		290			124		166
Gain (loss) on sale of investments, net		(24	)		407		(431	)
Trading securities gains		138			93		45
Service charges on deposit accounts		436			370		66
Interchange fees		484			385		99
Bank owned life insurance		208			110		98
Other		215			118		97

Total	$	2,013		$	2,066	$	(53	)

The $0.2 million decrease in mortgage banking income is primarily due to reduced volume.

Gains on sales of SBA loans increased $0.2 million as a result of more SBA loans being sold during the 2017 period. We continue to focus on our SBA lending efforts.

Net gains on sales of investments decreased $0.4 million for the three months ended September 30, 2017 compared to the same period in 2016 due an increase in interest rates which provided unfavorable market conditions for sales.

Interchange fees increased $0.1 million as a result of increased core deposit accounts including approximately $79.6 million related to the Stearns acquisition in February 2017.

BOLI income increased $0.1 million for the three months ended September 30, 2017 compared to the same period in 2016 due to the purchase of $10.0 million of additional policies in September of 2016.

Other noninterest income increased $0.1 million for the three months ended September 30, 2017 compared to the same period in 2016 due primarily to income from SBIC investments.

Noninterest Expense. The following table summarizes the components of noninterest expense and the corresponding change between the three months ended September 30, 2017 and 2016:

	Three Months Ended September 30,
	2017			2016		Change
	(Dollars in thousands)

Compensation and employee benefits	$	4,937		$	4,471	$	466
Net occupancy		974			929		45
Federal deposit insurance		140			108		32
Professional and advisory		292			208		84
Data processing		390			406		(16	)
Marketing and advertising		253			309		(56	)
Merger-related expenses		116			107		9
Net cost of (income from) operation of REO		(121	)		167		(288	)
Other		1,237			1,137		100

Total noninterest expenses	$	8,218		$	7,842	$	376

Compensation and employee benefits increased $0.5 million, or 10.4%, for the three months ended September 30, 2017 as compared to the same period in 2016. This additional expense is related to increases in our number of employees primarily as a result our Stearns branch acquisitions, annual raises, employee benefits, incentives and commissions.

Professional and advisory expenses increased $0.1 million for the three months ended September 30, 2017 compared to the same period in 2016 primarily as the result of increased fees for tax related services and fees related to public filing requirements.

Net cost of operation of REO decreased $0.3 million for the three months ended September 30, 2017 compared to the same period in 2016 primarily as the result of proceeds from a judgement settlement of $0.2 million.

Other noninterest expense increased $0.1 million for the three months ended September 30, 2017 compared to the same period in 2016 primarily as the result of increased interchange expenses and telephone expenses related to the Stearns branch acquisition.

Income Taxes. We recorded $1.1 million of income tax expense for the three months ended September 30, 2017 compared to $1.2 million for the same period in 2016. Our effective tax rate of 31.3% for the three months ended September 30, 2017 improved from 40.4% for the same period in 2016 primarily as the result of increased tax-exempt income related to municipal bond investments and BOLI income.

We continue to utilize unused net operating losses for federal and state income tax purposes and do not have a material current tax liability or receivable.

Comparison of Operating Results for the Nine Months Ended September 30, 2017 and September 30, 2016.

General. Net income increased $1.9 million to $5.9 million for the nine months ended September 30, 2017, compared to net income of $4.0 million for the nine months ended September 30, 2016. Net interest income increased $4.9 million to $30.2 million for the nine months ended September 30, 2017 compared to$25.3 million for the same period in 2016. Income tax expense decreased $0.3 million for the nine months ended September 30, 2017 compared to the same period in 2016. These increases to net income were partially offset by a provision for loan losses of $1.2 million, decreased noninterest income of $1.0 million, and increased noninterest expense of $1.2 million for the nine months ended September 30, 2017 compared to the nine months ending September 30, 2016.

Net Interest Income. Net interest income before provision for loan losses increased to $30.2 million for the nine months ended September 30, 2017, compared to $25.3 million for the same period in 2016. The increase in net interest income was primarily the result of a $2.8 million increase in interest and fees on loans and an increase of $2.7 million in interest on securities partially offset by increases in interest expense primarily due to increased interest expense on deposits and FHLB advances of $0.2 million and $0.7 million, respectively, during the nine months ended September 30, 2017 as compared to the same period in 2016.

The tax-equivalent net interest margin increased to 3.32% for the nine months ended September 30, 2017 compared to 3.28% for the same period in 2016. This increase was primarily the result of increased yields on investments combined with declines in time deposit rates, partially offset by increased rates on FHLB advances for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016.

	For the Nine Months Ended September 30,
	2017								2016
	Average Outstanding Balance			Interest		Yield/ Rate			Average Outstanding Balance			Interest		Yield/ Rate
	(Dollars in thousands)
Interest-earning assets:
Loans, including loans held for sale	$	765,810		$	26,686		4.66	%	$	683,879		$	23,885		4.65	%
Loans, tax exempt (1)		15,906			438		3.69	%		12,855			372		3.86	%
Investments - taxable		301,823			5,367		2.37	%		256,299			4,174		2.17	%
Investment tax exempt (1)		118,008			3,609		4.08	%		47,264			1,355		3.82	%
Interest earning deposits		58,067			459		1.06	%		39,546			152		0.51	%
Other investments, at cost		12,491			478		5.12	%		9,514			359		5.03	%

Total interest-earning assets		1,272,105			37,037		3.89	%		1,049,357			30,297		3.85	%

Noninterest-earning assets		100,321								83,071

Total assets	$	1,372,426							$	1,132,428

Interest-bearing liabilities:
Savings accounts	$	46,835		$	39		0.11	%	$	37,077		$	38		0.14	%
Time deposits		349,381			2,335		0.89	%		296,816			2,268		1.02	%
Money market accounts		255,013			704		0.37	%		221,956			548		0.33	%
Interest bearing transaction accounts		159,377			149		0.12	%		110,732			127		0.15	%
Total interest bearing deposits		810,606			3,227		0.53	%		666,581			2,981		0.60	%

FHLB advances		240,551			1,713		0.95	%		174,723			965		0.74	%
Junior subordinated debentures		14,433			418		3.87	%		14,433			394		3.64	%
Other borrowings		3,165			100		4.22	%		2,490			85		4.55	%

Total interest-bearing liabilities		1,068,755			5,458		0.68	%		858,227			4,425		0.69	%

Noninterest-bearing deposits		151,174								125,120

Other non interest bearing liabilities		14,204								13,839

Total liabilities		1,234,133								997,186
Total equity		138,293								135,242

Total liabilities and equity	$	1,372,426							$	1,132,428

Tax-equivalent net interest income				$	31,579							$	25,872

Net interest-earning assets ⁽²⁾	$	203,350							$	191,130

Average interest-earning assets to interest-bearing liabilities		119.03	%							122.27	%

Tax-equivalent net interest rate spread ⁽³⁾							3.21	%							3.16	%
Tax-equivalent net interest margin ⁽⁴⁾							3.32	%							3.28	%

(1) Tax exempt loans and investments are calculated giving effect to a 35% 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.

	For the Nine Months Ended September 30, 2017 Compared to the Nine Months Ended September 30, 2016
	Increase (decrease) due to:
	Volume		Rate			Total
	(Dollars in thousands)
Interest-earning assets:
Loans, including loans held for sale (1)	$	2,752	$	49		$	2,801
Loans, tax exempt (2)		83		(17	)		66
Investment - taxable		786		407			1,193
Investments - tax exempt (2)		2,156		98			2,254
Interest-earning deposits		93		214			307
Other investments, at cost		113		6			119

Total interest-earning assets		5,983		757			6,740

Interest-bearing liabilities:
Savings accounts	$	9	$	(8	)	$	1
Time deposits		375		(308	)		67
Money market accounts		87		69			156
Interest bearing transaction accounts		50		(28	)		22
FHLB advances		427		321			748
Junior subordinated debentures		—		24			24
Other borrowings		21		(6	)		15

Total interest-bearing liabilities	$	969	$	64		$	1,033

Change in tax-equivalent net interest income	$	5,014		693		$	5,707

(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 $30.2 million for the nine months ended September 30, 2017, compared to $25.3 million for the same period in 2016. As indicated in the table above, $5.0 million of the increase is attributable to increased volume, and the remaining $0.7 million improvement is the result of improved rates mainly for investments and interest-earning deposits.

The increase in tax-equivalent net interest income of $5.0 million related to volume was primarily the result of higher average loan and tax exempt investment balances which increased $81.9 million and $70.7 million, respectively, for the nine months ended September 30, 2017 as compared to the same period in 2016. The increase in average loan and investment balances was partially offset by higher average time deposits and FHLB advance balances which increased $52.6 million and $65.8 million, respectively, over the same periods.

The increase in tax-equivalent net interest income of $0.7 million for the nine months ended September 30, 2017 compared to the same period in 2016 related to rate was primarily the result of increased rates on average taxable investments and interest-earning deposits of 20 and 55 basis points, respectively. The reduced rates on average time deposits of 13 basis points for the nine months period ending September 30, 2017 compared to the same period in 2016 was offset by an increased rate on average FHLB advances of 21 basis points for the same period.

Our tax-equivalent net interest rate spread increased by 5 basis points to 3.21% for the nine months ended September 30, 2017 compared to 3.16% for the nine months ended September 30, 2016. Our tax-equivalent net interest margin increased 4 basis points to 3.32% for the nine months ended September 30, 2017, compared to 3.28% for the nine months ended September 30, 2016. As mentioned above, the increases in our interest rate spread and margin were primarily a result of the increases in taxable loans and investment yields and reduced rates on time deposits.

Provision for Loan Losses. The Company continues to experience a low level of net charge-offs and non-performing assets. A provision for loan losses of $1.2 million was recorded for the nine month period ended September 30, 2017 to account for loan growth. A provision for loan losses of $0.1 million was recorded in the same period of 2016.

Noninterest Income. The following table summarizes the components of noninterest income and the corresponding change between the nine month periods ended September 30, 2017 and 2016:

	Nine Months Ended September 30,
	2017			2016		Change
	(Dollars in thousands)
Servicing income, net	$	312		$	263	$	49
Mortgage banking		771			747		24
Gain on sale of SBA loans		436			742		(306	)
Gain on sale of investments, net		19			1,105		(1,086	)
Gain on trading securities		445			271		174
Other than temporary impairment on AFS securities		(700	)		—		(700	)
Service charges on deposit accounts		1,239			1,151		88
Interchange fees		1,374			1,109		265
Bank owned life insurance		603			311		292
Other		527			341		186

Total	$	5,026		$	6,040	$	(1,014	)

Gain on sale of SBA loans decreased $0.3 million for the nine months ended September 30, 2017, compared to the same period in 2016 as a result of fewer SBA loans being originated and sold during the 2017 period. We continue to focus on our SBA lending efforts.

Net gains on sales of investments decreased $1.1 million for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, due to an increase in interest rates which provided for unfavorable market conditions for sales.

Gain on trading securities increased $0.2 million for the nine months ended September 30, 2017, compared to the same period in 2016, due to increases in market valuation.

Interchange fees increased $0.3 million for the nine months ended September 30, 2017, compared to the same period in 2016, due primarily to the Old Town Bank acquisition in April of 2016 and the Stearns branch acquisition in February of 2017.

BOLI income increased $0.3 million for the nine months ended September 30, 2017, compared to the same period in 2016, due to the purchase of $10.0 million of additional policies in the third quarter of 2016.

Other noninterest income increased $0.2 million for the nine months ended September 30, 2017, compared to the same period in 2016, primarily as a result of miscellaneous loan related income and income from SBIC investments.

Noninterest Expense. The following table summarizes the components of noninterest expense and the corresponding change between the nine months ended September 30, 2017 and 2016:

	Nine Months Ended September 30,
	2017		2016		Change
	(Dollars in thousands)

Compensation and employee benefits	$	14,859	$	12,738	$	2,121
Net occupancy		2,851		2,580		271
Marketing and advertising		727		811		(84	)
Federal deposit insurance		379		468		(89	)
Professional and advisory		929		713		216
Data processing		1,215		1,157		58
Merger-related expenses		972		2,023		(1,051	)
Net cost of operation of real estate owned		94		663		(569	)
Other		3,666		3,281		385

Total noninterest expenses	$	25,692	$	24,434	$	1,258

Compensation and employee benefits increased $2.1 million, or 16.7%, for the nine months ended September 30, 2017 as compared to the same period in 2016. This additional expense is related to increases in our number of employees primarily as a result of the Old Town Bank acquisition in April 2016 and the Stearns branch acquisition in February 2017, annual raises, employee benefits, incentives and commissions.

Net occupancy increased $0.3 million for the nine months ended September 30, 2017, compared to the same period in 2016 primarily as a result of the Old Town Bank acquisition in April 2016 and the Stearns branch acquisition in February 2017.

FDIC deposit insurance decreased $0.1 million for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016 as a result of a reduction in our assessment rates due to an improving risk profile.

Professional and advisory expense increased $0.2 million for the nine months ended September 30, 2017, compared to the same period in 2016 primarily due to increased tax compliance and expenses related to public reporting requirements.

Merger-related expenses decreased $1.1 million for the nine months ended September 30, 2017, compared to the same period in 2016. The 2016 merger expenses include a core processor termination fee related to the Old Town acquisition.

Net cost of operation of real estate owned decreased $0.6 million for the nine months ended September 30, 2017, compared to the same period in 2016 as the result of reduced levels of real estate owned and continued stabilization of property values.

Other noninterest expense increased $0.4 million for the nine months ended September 30, 2017 compared to the same period in 2016 primarily as the result of increases in debit card expense and interchange fees of $0.1 million and telecommunications expense of $0.1 million related to the Old Town Bank acquisition in April 2016 and the Stearns branch acquisition in February 2017, and an increase in loan related expenses of $0.1 million.

Income Taxes. We recorded a $2.5 million income tax expense for the nine months ended September 30, 2017 compared to $2.8 million tax expense for the nine months ended September 30, 2016. Our effective tax rate of 29.6% for the nine months ended September 30, 2017, compared to 40.6% for the respective period in 2016, improved primarily as the result of increased tax-exempt income related to municipal bond investments and BOLI income.

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 Financial Officer, is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we have enough sources of liquidity to satisfy our short- and long-term liquidity needs as of September 30, 2017.

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 September 30, 2017, cash and cash equivalents totaled $94.5 million. Included in this total was $65.9 million held at FRB and $2.2 million held at the FHLB in interest-earning accounts.

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 nine months ended September 30, 2017 and 2016:

	Nine Months Ended September 30,
	2017			2016
	(Dollars in thousands)
Operating activities:
Loans originated for sale	$	(35,718	)	$	(38,402	)
Proceeds from loans originated for sale		36,548			39,811

Investing activities:
Purchases of investments	$	(127,989	)	$	(152,034	)
Maturities and principal repayments of investments		35,009			28,514
Sales of investments		92,316			115,328
Net increase in loans		(71,578	)		(40,859	)
Net cash received in branch acquisition		146,750			—
Proceeds from sale of real estate owned		1,475			1,973
Purchase of fixed assets		(594	)		(295	)
Purchase of bank owned life insurance		—			(10,000	)
Purchase of SBIC Holdings, at cost		(1,435	)		(652	)
Purchase of other investments, at cost		(425	)		(2,048	)
Redemption of other investments, at cost		3,053			—
Net cash paid in business combinations					(5,912	)

Financing activities:
Net increase in deposits	$	19,384		$	30,880
Proceeds from FHLB advances		808,501			445,100
Repayment of FHLB advances		(873,501	)		(399,125	)
Purchase of common stock		(320	)		(1,390	)

At September 30, 2017, we had $38.1 million in outstanding commitments to originate loans. In addition to commitments to originate loans, we had $114.9 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 September 30, 2017.

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, the FRB discount window, and a revolving credit loan facility with NexBank SSB. The following summarizes our borrowing capacity as of September 30, 2017:

	Total		Used		Unused
(Dollars in thousands)	Capacity		Capacity		Capacity

FHLB	$	247,316	$	233,500	$	13,816
Unpledged Marketable Securities		400,610		161,416		239,194
Fed funds lines		15,000		—		15,000
FRB		47,530		—		47,530
NexBank		15,000		5,000		10,000
	$	725,456	$	399,916	$	325,540

In July 2013, the Federal Reserve and the FDIC 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 final 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 AFS 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.

When Basel III is fully phased in on January 1, 2019, the Company and the Bank will be required to maintain a 2.5% capital conservation buffer which is designed to absorb losses during periods of economic distress. This capital conservation buffer is comprised entirely of Common Equity Tier 1 Capital and is in addition to minimum risk-weighted asset ratios.

The tables below summarize capital ratios and related information in accordance with Basel III as measured at September 30, 2017 and December 31, 2016.

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

	Actual					For Capital Adequacy Purposes (1)				To Be Well- Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Ratio			Amount		Ratio		Amount		Ratio
As of September 30, 2017:
Tier 1 Leverage Capital	$	140,153		10.12	%	$	55,400		>4%	$	69,250		>5%
Common Equity Tier 1 Capital	$	140,153		14.36	%	$	56,104		>5.75%	$	63,422		>6.5%
Tier 1 Risk-based Capital	$	140,153		14.36	%	$	70,740		>7.25%	$	78,058		>8%
Total Risk-based Capital	$	150,310		15.40	%	$	90,254		>9.25%	$	97,572		>10%

As of December 31, 2016:
Tier 1 Leverage Capital	$	138,402		11.06	%	$	50,034		>4%	$	62,542		>5%
Common Equity Tier 1 Capital	$	138,402		16.33	%	$	38,150		>5.125%	$	55,106		>6.5%
Tier 1 Risk-based Capital	$	138,402		16.33	%	$	50,867		>6.625%	$	67,823		>8%
Total Risk-based Capital	$	147,807		17.43	%	$	67,823		>8.625%	$	84,778		>10%

(1)

As of September 30, 2017, includes capital conservation buffer of 1.25%. On a fully phased in basis, effective January 1, 2019, under Basel III, minimum capital ratios to be considered “adequately capitalized” including the capital conservation buffer of 2.5% will be as follows: Tier 1 Leverage Capital – 4.0%; Common Equity Tier 1 Capital – 7.0%; Tier 1 Risk-based Capital – 8.5%; and Total Risk-based Capital – 10.5%.

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

	Actual					For Capital Adequacy Purposes (1)
(Dollars in thousands)	Amount		Ratio			Amount		Ratio
As of September 30, 2017:
Tier I Leverage Capital	$	143,631		10.36	%	$	55,433		>4%
Common Equity Tier 1 Capital	$	130,527		13.37	%	$	56,152		>5.75%
Tier I Risk-based Capital	$	143,631		14.71	%	$	70,800		>7.25%
Total Risk Based Capital	$	153,788		15.75	%	$	90,331		>9.25%

As of December 31, 2016:
Tier I Leverage Capital	$	141,013		11.28	%	$	50,220		>4%
Common Equity Tier 1 Capital	$	130,079		15.33	%	$	38,188		>5.125%
Tier I Risk-based Capital	$	141,013		16.62	%	$	50,918		>6.625%
Total Risk Based Capital	$	150,418		17.72	%	$	67,891		>8.625%

(1)

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;

•

engaged in interest rate swap agreements;

•

utilized FHLB advances for positioning.

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

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.

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).

	September 30, 2017						December 31, 2016
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		(5.7	)		(6.2	)		(9.2	)		(15.2	)
+300		(3.8	)		(4.8	)		(6.6	)		(11.7	)
+200		(2.1	)		(3.6	)		(4.2	)		(7.9	)
+100		(1.0	)		(2.4	)		(2.1	)		(4.7	)
—		—			—			—			—
-100		(2.0	)		5.2			(1.7	)		8.7

The results from the rate shock analysis on NII are consistent with having a slightly liability sensitive balance sheet. Having a liability sensitive balance sheet means liabilities will reprice at a faster pace than assets during the short-term horizon. The implications of a liability sensitive balance sheet will differ depending upon the change in market rates. For example, with a liability sensitive balance sheet in a declining interest rate environment, the interest rate on liabilities will decrease at a faster pace than assets. This situation generally results in an increase in NII and operating income. Conversely, with a liability sensitive balance sheet in a rising interest rate environment, the interest rate on liabilities will increase at a faster pace than assets. This situation generally results in a decrease in NII and operating income. As indicated in the table above, a 200 basis point increase in rates would result in a 2.1% decrease in NII as of September 30, 2017 as compared to a 4.2% decrease in NII as of December 31, 2016, suggesting that there is a slight cost for the Company to net interest income in rising interest rates 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 from December 31, 2016 to September 30, 2017. For example, as indicated in the table above, a 200 basis point increase in rates would result in a 3.6% decrease in EVE as of September 30, 2017 as compared to a 7.9% decrease in EVE as of December 31, 2016.

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 September 30, 2017. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer each concluded that as of September 30, 2017, 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 September 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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 September 30, 2017.

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 2016 Annual Report on Form 10-K as filed with the SEC on March 15, 2017.

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

The table below sets forth information regarding the Company’s common stock repurchases during the nine months ended September 30, 3017:

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, 2017 to January 31, 2017		—	$	—		—		222,750
February 1, 2017 to February 28, 2017		—	$	—		—		222,750
March 1, 2017 to March 31, 2017		13,000	$	23.12		13,000		209,750
April 1, 2017 to June 30, 2017		—	$	—		—		209,750
July 1, 2017 to September 30, 2017		—	$	—		—		209,750
Total year-to-date 2017		13,000	$	23.12		13,000		209,750

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

None

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).

2.2	Agreement and Plan of Merger and Reorganization, dated June 26, 2017, by and among Entegra Financial Corp., Entegra Bank and Chattahoochee Bank of Georgia, incorporated by reference to Exhibit 2.1 of the Current Report on Form 8-k, filed with the SEC on June 27, 2017 (SEC File No. 001-35302).

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	Amended and Restated Bylaws of Entegra Financial Corp. incorporated by reference to Exhibit 3.1 of the Current Report on Form 8-K, filed with the SEC on September 1, 2017 (SEC File No. 001-35302).

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).

Exhibit No.	Description

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).*

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.

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: November 8, 2017	Entegra Financial Corp.
	(Registrant)


	By:	/s/ David A. Bright
	Name: David A. Bright
	Title: Chief Financial Officer
	(Authorized Officer)

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.

Attached files

Entegra Financial Corp. Reports

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