Newbridge Bancorp (NBBC) 8-K/A Financial Statements and Exhibits

Exhibit 99.2

Condensed Consolidated

Financial Statements

(unaudited)

September 30, 2013

Security Savings Bank, SSB and Subsidiary

Condensed Consolidated Financial Statements (unaudited)

September 30, 2013

Table of Contents
Consolidated Statements of Financial Condition	2
Consolidated Statements of Operations (Three Months)	3
Consolidated Statements of Operations (Nine Months)	4
Consolidated Statements of Comprehensive Loss	5
Consolidated Statements of Changes in Equity	6
Consolidated Statements of Cash Flows	7
Notes to Consolidated Financial Statements	8

1

Security Savings Bank, SSB and Subsidiary

Consolidated Statements of Financial Condition

September 30, 2013 (unaudited) and December 31, 2012 (audited)

	2013		2012
Assets
Cash and due from banks	$	1,073,731	$	671,344
Interest-earning deposits with banks		37,174,641		35,117,334
Cash and cash equivalents		38,248,372		35,788,678
Restricted cash		16,805,700		10,281,700
Investment securities held to maturity (fair value of $1,478,514 in 2013 and $8,052,665 in 2012)		1,449,865		7,999,388
Loans receivable, net of allowance for loan losses of $4,514,000 in 2013 and $6,883,198 in 2012		134,187,881		158,530,063
Accrued interest receivable		534,270		762,332
Premises and equipment		9,542,587		11,597,851
Other real estate owned		6,056,508		10,301,128
Real estate held for sale		1,784,936		1,767,648
Stock in the Federal Home Loan Bank of Atlanta, at cost		2,089,600		2,489,700
Corporate-owned life insurance		1,442,987		1,481,729
Other assets		197,831		180,339
Total assets	$	212,340,537	$	241,180,556
Liabilities and Equity
Deposits:
Noninterest-bearing deposits	$	14,199,342	$	13,826,727
Interest-bearing deposits		152,980,512		175,311,293
Total deposits		167,179,854		189,138,020
Advances from the Federal Home Loan Bank		40,000,000		45,000,000
Accrued interest payable		228,045		245,570
Advance payments by borrowers for property taxes and insurance		281,287		83,961
Accrued expenses and other liabilities		393,937		564,964
Total liabilities		208,083,123		235,032,515
Retained earnings, substantially restricted		4,257,414		6,148,041
Total equity		4,257,414		6,148,041
Total liabilities and equity	$	212,340,537	$	241,180,556

See Notes to Consolidated Financial Statements

2

Security Savings Bank, SSB and Subsidiary

Consolidated Statements of Operations

For the three month periods ended September 30, 2013 and 2012 (unaudited)

	Three months ended
	2013			2012
Interest and dividend income
Loans	$	1,897,755		$	2,431,216
Investment securities		9,371			35,610
Federal funds sold, deposits with banks		25,661			35,551
Dividend income		13,181			10,196
Total interest and dividend income		1,945,968			2,512,573
Interest expense
Deposit accounts		243,077			431,029
Advances from the Federal Home Loan Bank		443,772			488,704
Total interest expense		686,849			919,733
Net interest income		1,259,119			1,592,840
Provision for loan losses		-			442,328
Net interest income after provision for loan losses		1,259,119			1,150,512
Non-interest income
Service charges on deposit accounts		106,815			147,668
Service charges and other fees		2,846			5,068
Fees from presold mortgages		3,334			11,351
Income (loss) from corporate-owned life insurance		68,805			(11,541	)
Loss on disposition of premises and equipment		(4,181	)		(2,017	)
Other		12,593			10,357
Total non-interest income		190,212			160,886
Non-interest expenses
Salaries and employee benefits		926,042			886,282
Occupancy		328,540			330,926
Data processing and outside service fees		152,477			274,488
Federal deposit insurance premiums		187,225			324,734
Supplies, telephone and postage		35,897			46,494
Other real estate owned, net		1,137,352			1,333,031
NOW check expense		53,095			46,366
Other general and administrative		148,599			108,589
Total non-interest expenses		2,969,227			3,350,910
Loss before income taxes		(1,519,896	)		(2,039,512	)
Income tax expense		25			-
Net loss	$	(1,519,921	)	$	(2,039,512	)

See Notes to Consolidated Financial Statements

3

Security Savings Bank, SSB and Subsidiary

Consolidated Statements of Operations

For the nine month periods ended September 30, 2013 and 2012 (unaudited)

	Nine months ended
	2013			2012
Interest and dividend income
Loans	$	6,027,586		$	7,780,450
Investment securities		42,676			186,356
Federal funds sold, deposits with banks		66,875			102,843
Dividend income		41,647			31,581
Total interest and dividend income		6,178,784			8,101,230
Interest expense
Deposit accounts		828,910			1,438,604
Advances from the Federal Home Loan Bank		1,337,904			1,455,488
Total interest expense		2,166,814			2,894,092
Net interest income		4,011,970			5,207,138
Provision for loan losses		-			840,073
Net interest income after provision for loan losses		4,011,970			4,367,065
Non-interest income
Service charges on deposit accounts		331,208			446,349
Service charges and other fees		8,869			15,152
Fees from presold mortgages		11,269			32,293
Income (loss) from corporate-owned life insurance		44,607			(36,098	)
Gain from corporate-owned life insurance death benefit		78,500			-
Gain on disposition of premises and equipment		28,818			1,456
Other		44,777			19,747
Total non-interest income		548,048			478,899
Non-interest expenses
Salaries and employee benefits		2,470,044			3,209,537
Occupancy		787,657			959,432
Data processing and outside service fees		699,521			820,259
Federal deposit insurance premiums		566,546			656,729
Supplies, telephone and postage		125,209			150,784
Other real estate owned, net		1,297,067			4,337,334
NOW check expense		139,603			152,254
Other general and administrative		364,973			374,140
Total non-interest expenses		6,450,620			10,660,469
Loss before income taxes		(1,890,602	)		(5,814,505	)
Income tax expense		25			-
Net loss	$	(1,890,627	)	$	(5,814,505	)

See Notes to Consolidated Financial Statements

4

Security Savings Bank, SSB and Subsidiary

Consolidated Statements of Comprehensive Loss

For the three and nine month periods ended September 30, 2013 and 2012 (unaudited)

	Three months ended
	2013			2012
Net loss	$	(1,519,921	)	$	(2,039,512	)
Other comprehensive income (loss), net of tax		-			-
Comprehensive loss	$	(1,519,921	)	$	(2,039,512	)

	Nine months ended
	2013			2012
Net loss	$	(1,890,627	)	$	(5,814,505	)
Other comprehensive income (loss), net of tax		-			-
Comprehensive loss	$	(1,890,627	)	$	(5,814,505	)

See Notes to Consolidated Financial Statements

5

Security Savings Bank, SSB and Subsidiary

Consolidated Statements of Changes In Equity

For the nine months ended September 30, 2013 and 2012 (unaudited)

				Accumulated
				Other
	Retained			Comprehensive		Total
	Earnings			Loss		Equity
Balance, December 31, 2012	$	6,148,041		$	-	$	6,148,041
Net loss		(1,890,627	)		-		(1,890,627	)
Balance, September 30, 2013	$	4,257,414		$	-	$	4,257,414
Balance, December 31, 2011	$	13,594,623		$	-	$	13,594,623
Net loss		(5,814,505	)		-		(5,814,505	)
Balance, September 30, 2012	$	7,780,118		$	-	$	7,780,118

See Notes to Consolidated Financial Statements

6

Security Savings Bank, SSB and Subsidiary

Consolidated Statements of Cash Flows

For the nine month periods ended September 30, 2013 and 2012 (unaudited)

	2013			2012
Cash flows from operating activities
Net loss	$	(1,890,627	)	$	(5,814,505	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation of premises and equipment		301,338			430,776
Amortization of investment securities, net		-			8,552
Gain on disposition of premises and equipment		(28,818	)		(1,456	)
Gain from corporate-owned life insurance death benefit		(78,500	)		-
Loss (gain) on sale of other real estate owned and real estate held for sale		(485,964	)		135,279
Write down on other real estate owned and real estate held for sale		1,483,474			3,451,071
Provision for loan losses		-			840,073
Income (loss) from corporate-owned life insurance		(80,249	)		-
Increase in advance payments by borrowers for property taxes and insurance		197,326			190,981
Changes in assets and liabilities:
Accrued interest receivable		228,062			243,586
Other assets		(17,492	)		(5,308	)
Accrued interest payable		(17,525	)		(5,907	)
Accrued expenses and other liabilities		(171,027	)		26,557
Net cash used by operating activities		(560,002	)		(500,301	)
Cash flows from investing activities
Increase in restricted cash		(6,524,000	)		(4,456,675	)
Purchases of held to maturity investment securities		-			(8,000,000	)
Proceeds from maturities/calls/principal repayments  of held to maturity investment securities		6,549,523			9,133,775
Decrease in loans, net		23,158,747			27,105,144
Purchases of premises and equipment		-			(67,871	)
Disposals of premises and equipment		1,220,247			11,445
Proceeds from sale of other real estate owned and real estate held for sale		4,975,754			4,612,066
Proceeds from corporate-owned life insurance death benefit		197,491			-
Redemption of Federal Home Loan Bank stock		400,100			562,600
Net cash provided by investing activities		29,977,862			28,900,484
Cash flows from financing activities
Net decrease in deposit accounts		(21,958,166	)		(33,618,537	)
Repayment of advances from Federal Home Loan Bank, net		(5,000,000	)		-
Net cash used by financing activities		(26,958,166	)		(33,618,537	)
Net increase (decrease) in cash and cash equivalents		2,459,694			(5,218,354	)
Cash and cash equivalents, beginning of period		35,788,678			61,105,752
Cash and cash equivalents, ending of period	$	38,248,372		$	55,887,398
Supplemental disclosure of cash flow information
Cash paid during year for:
Interest	$	2,484,339		$	2,899,999
Income taxes	$	-		$	-
Supplemental schedule of noncash investing and financing activities
Loans receivable transferred to other real estate owned	$	1,183,435		$	2,655,836
Premises transferred to real estate held for sale	$	562,497		$	643,422

See Notes to Consolidated Financial Statements

7

Security Savings Bank, SSB and Subsidiary

Notes to Consolidated Financial Statements

September 30, 2013 and December 31, 2012

Note 1.       Basis of Presentation and Summary of Significant Accounting Policies

Organization:

The consolidated financial statements include the accounts of Security Savings Bank, SSB (the “Bank”) and its wholly-owned subsidiary, Security Financial Services Corporation. The Bank’s principal business activity is providing consumer, mortgage and commercial loan and deposit banking services to individuals and business customers. The Bank primarily serves customers in Brunswick county, North Carolina and is headquartered in Southport, North Carolina. As a savings bank, the Bank is subject to regulation by the State of North Carolina Banking Commission and the Federal Deposit Insurance Corporation.

Critical Accounting Policies:

The Bank has adopted various accounting policies, which govern the application of accounting principles generally accepted in the United States in the preparation of our financial statements. Our significant accounting policies are described in the footnotes to the audited consolidated financial statements as of and for the year ended December 31, 2012 included in our 2012 Annual Report to Shareholders. Certain accounting policies involve significant judgments and assumptions by management, which have a material impact on the carrying value of certain assets and liabilities, and, as such, have a greater possibility of producing results that could be materially different than originally reported. We consider these accounting policies to be critical accounting policies. The judgments and assumptions we use are based on historical experience and other factors, which we believe to be reasonable under the circumstances. Because of the nature of the judgments and assumptions we make, actual results could differ from these judgments and estimates which could have a material impact on our carrying values of assets and liabilities and our results of operations.

Use of Estimates:

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the 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 relate to the determination of the allowance for losses on loans and valuation of other real estate owned.

Substantially all of the Bank’s loan portfolio consists of loans in its market area. Accordingly, the ultimate collectability of a substantial portion of the Bank’s loan portfolio and the recovery of a substantial portion of the carrying amount of foreclosed real estate are susceptible to changes in local market conditions. The regional economy is diverse, but influenced by the manufacturing and retirement segments and to an extent by the tourism and agricultural segments.

Interim Financial Information:

The accompanying consolidated financial statements for the periods ended September 30, 2013 and 2012 are condensed and therefore, do not include all disclosures necessary for a complete presentation of financial condition, results of operations, and cash flows in accordance with accounting principles generally accepted in the United States of America. Such statements are unaudited but, in the opinion of management, reflect all adjustments, which are of a normal recurring nature and necessary for a fair presentation of results for the selected interim periods. Users of financial information produced for interim periods are encouraged to refer to the footnotes contained in the audited financial statements as of and for the year ended December 31, 2012 incorporated into this filing on form 8-K/A when reviewing the interim financial statements. The results of operations for the three and nine month periods ended September 30, 2013 are not necessarily indicative of the results that may be expected for the entire fiscal year or any other period.

8

Security Savings Bank, SSB and Subsidiary

Notes to Consolidated Financial Statements

September 30, 2013 and December 31, 2012

Note 1.       Basis of Presentation and Summary of Significant Accounting Policies, continued

Subsequent Events:

Management has evaluated events occurring subsequent to the balance sheet date through December 10, 2013 which is the date these financial statements were available to be issued. In preparing these financial statements, the Bank has evaluated events and transactions for potential recognition or disclosure. The following events or transactions met the disclosure requirements under ASC 855-10:

· Merger With NewBridge Bank.Effective October 1, 2013, NewBridge Bank acquired the assets and liabilities of the Bank in a transaction effected pursuant to an order of the North Carolina Commissioner of Banks. No shares were issued or cash exchanged in the transaction, and the merger was not subject to member approval.

Regulatory Enforcement Action and Going Concern:

Prior to the merger with NewBridge Bank, the Bank was subject to a Consent Order with the FDIC and the North Carolina Commissioner of Banks and substantial doubt existed about its ability to continue as a going concern.

Recent Accounting Pronouncements:

The following is a summary of recent authoritative pronouncements:

The Comprehensive Income topic of the ASC was amended in June 2011. The amendment eliminated the option to present other comprehensive income as a part of the statement of changes in stockholders’ equity and required consecutive presentation of the statement of net income and other comprehensive income. The amendments were applicable to the Bank January 1, 2012 and have been applied retrospectively. In December 2011, the topic was further amended to defer the effective date of presenting reclassification adjustments from other comprehensive income to net income on the face of the financial statements while the FASB redeliberated the presentation requirements for the reclassification adjustments. In February 2013, the FASB further amended the Comprehensive Income topic clarifying the conclusions from such redeliberations. Specifically, the amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments do require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, in certain circumstances an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. The amendments will be effective for the Bank on a prospective basis for reporting periods beginning after December 15, 2013. Early adoption is permitted-private companies. As a result of the merger, the Bank does not expect these amendments to have any effect on its financial statements.

On April 22, 2013, the FASB issued guidance addressing application of the liquidation basis of accounting. The guidance is intended to clarify when an entity should apply the liquidation basis of accounting. In addition, the guidance provides principles for the recognition and measurement of assets and liabilities and requirements for financial statements prepared using the liquidation basis of accounting. The amendments will be effective for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013, and interim reporting periods therein and those requirements should be applied prospectively from the day that liquidation becomes imminent. Early adoption is permitted. As a result of the merger, the Bank does not expect these amendments to have any 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 Bank’s financial position, results of operations or cash flows.

9

Security Savings Bank, SSB and Subsidiary

Notes to Consolidated Financial Statements

September 30, 2013 and December 31, 2012

Note 2.       Restrictions on Cash

To comply with banking regulations, the Bank is required to maintain certain average cash reserve balances. The daily average cash reserve requirements for the nine months ended September 30, 2013 and the twelve months ended December 31, 2012 were approximately $749,000 and $771,000, respectively. At September, 30, 2013 and December 31, 2012, the Bank was in compliance with the reserve requirement.

At September, 30, 2013 and December 31, 2012, the Bank had pledged $16,473,000 and $10,219,000, respectively, in an interest-bearing account as collateral. The Bank has also assigned a certificate of deposit amounting to $62,700 to the North Carolina Department of Environment and Natural Resources at September 30, 2013 and December 31, 2012. These accounts are shown as restricted cash on the consolidated statements of financial condition.

Note 3.       Investment Securities

The following is a summary of the securities portfolio by major classification:

	September 30, 2013
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Securities held to maturity:
Government sponsored enterprises	$	1,000,000	$	-	$	17,000	$	983,000
Mortgage-backed securities		449,865		45,649		-		495,514
	$	1,449,865	$	45,649	$	17,000	$	1,478,514

	December 31, 2012
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Securities held to maturity:
Government sponsored enterprises	$	7,500,000	$	5,497	$	1,086	$	7,504,411
Mortgage-backed securities		499,388		48,866		-		548,254
	$	7,999,388	$	54,363	$	1,086	$	8,052,665

The Bank had $500,000 of investment securities pledged to The Senior Housing Crime Prevention Foundation (the “Foundation”) at December 31, 2012. These securities were pledged in conjunction with the acquisition of preferred stock in the Foundation. Income from the pledged securities was used by the Foundation to maintain its operations and to contract for the operation of crime reduction and prevention programs in a senior housing facility in Brunswick County in the State of North Carolina. The Bank was required to maintain the investment in Senior Housing Crime Prevention foundation until May 23, 2013. This investment was terminated in May, 2013.

All other securities were pledged as collateral on public deposits, Federal Home Loan Bank advances, or for other purposes at September 30, 2013 and December 31, 2012.

There were no sales of investment securities during 2013 or 2012.

10

Security Savings Bank, SSB and Subsidiary

Notes to Consolidated Financial Statements

September 30, 2013 and December 31, 2012

Note 3.       Investment Securities, continued

The following table shows gross unrealized losses and fair values of investment securities, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at September 30, 2013 and December 31, 2012. The unrealized loss relates to debt securities that have incurred fair value reductions due to higher market interest rates since the securities were purchased. The unrealized loss is not likely to reverse unless market interest rates decline to the levels that existed when the securities were purchased. Since none of the unrealized losses relate to the marketability of the securities or the issuer’s ability to honor redemption obligations, none of the securities are deemed to be other than temporarily impaired.

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
September 30, 2013
Securities held to maturity:
Government sponsored enterprises	$	983,000	$	17,000	$	-	$	-	$	983,000	$	17,000
Total temporarily impaired securities	$	983,000	$	17,000	$	-	$	-	$	983,000	$	17,000

	Less Than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
December 31, 2012
Securities held to maturity:
Government sponsored enterprises	$	998,914	$	1,086	$	-	$	-	$	998,914	$	1,086
Total temporarily impaired securities	$	998,914	$	1,086	$	-	$	-	$	998,914	$	1,086

Management considers the nature of the investment, the underlying causes of the decline in market value, the severity and duration of the decline in market value and other evidence, on a security by security basis, in determining if the decline in market value is other than temporary. Management believes all unrealized losses presented in the table above to be temporary in nature.

The amortized cost and fair values of securities held to maturity at September 30, 2013 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call obligations with or without call penalties.

A summary of scheduled maturities of securities held to maturity as of September 30, 2013 follows:

	Amortized		Fair
	Cost		Value
Due in one year or less	$	-	$	-
Due in one through five years		-		-
Due in five years and thereafter		1,449,865		1,478,514
	$	1,449,865	$	1,478,514

11

Security Savings Bank, SSB and Subsidiary

Notes to Consolidated Financial Statements

September 30, 2013 and December 31, 2012

Note 4.       Loans Receivable and Allowance for Loan Losses

The major components of loans on the balance sheet at September 30, 2013 and December 31, 2012 are as follows (in thousands):

	2013			2012
1-4 family real estate	$	57,519		$	62,745
1-4 family lines of credit		22,079			24,493
Consumer lot loans		4,107			4,713
Commercial 1-4 family		16,790			20,944
Commercial non-residential		29,124			34,338
Commercial land only		5,801			7,930
Commercial construction		-			1,263
Commercial line of credit		789			2,968
Other non-real estate		2,493			6,019
Total gross loans		138,702			165,413
Allowance for loan losses		(4,514	)		(6,883	)
Total net loans	$	134,188		$	158,530

The allocation of the allowance for loan losses by loan components (in thousands) at September 30, 2013 is as follows:

	1-4			1-4			Consumer			Commercial			Commercial
	Family			Family			Lot			1-4			Non			Commercial			Commercial			Commercial			Other
	RE			LOC			Loans			Family			Residential			Land Only			Construction			LOC			Non RE			Unallocated		Total
2013
Allowance for credit losses:
Three months ended September 30, 2013:
Beginning balance	$	1,062		$	977		$	413		$	639		$	946		$	700		$	-		$	28		$	94		$	35	$	4,894
Charge-offs		(61	)		(302	)		(3	)		(25	)		-			(30	)		-			-			(4	)		-		(425	)
Recoveries		5			7			9			4			-			6			6			-			8			-		45
Provision		(70	)		(4	)		(32	)		(1	)		(53	)		(67	)		(6	)		(9	)		(9	)		251		-
Ending balance	$	936		$	678		$	387		$	617		$	893		$	609		$	-		$	19		$	89		$	286	$	4,514
Nine months ended September 30, 2013:
Beginning balance	$	1,302		$	843		$	896		$	1,574		$	956		$	1,092		$	10		$	65		$	145		$	-	$	6,883
Charge-offs		(452	)		(605	)		(129	)		(833	)		-			(479	)		-			-			(100	)		-		(2,598	)
Recoveries		29			18			99			9			-			23			19			-			32			-		229
Provision		57			422			(479	)		(133	)		(63	)		(27	)		(29	)		(46	)		12			286		-
Ending balance	$	936		$	678		$	387		$	617		$	893		$	609		$	-		$	19		$	89		$	286	$	4,514
Ending balance: individually evaluated for impairment	$	281		$	168		$	218		$	318		$	549		$	207		$	-		$	-		$	12		$	-	$	1,753
Ending balance: collectively evaluated for impairment	$	655		$	510		$	169		$	299		$	344		$	402		$	-		$	19		$	77		$	286	$	2,761
Loans Receivables:
Ending balance	$	57,519		$	22,079		$	4,107		$	16,790		$	29,124		$	5,801		$	-		$	789		$	2,493		$	-	$	138,702
Ending balance: individually evaluated for impairment	$	7,343		$	874		$	715		$	7,659		$	7,461		$	1,968		$	-		$	100		$	523		$	-	$	26,643
Ending balance: collectively evaluated for impairment	$	50,176		$	21,205		$	3,392		$	9,131		$	21,663		$	3,833		$	-		$	689		$	1,970		$	-	$	112,059

12

Security Savings Bank, SSB and Subsidiary

Notes to Consolidated Financial Statements

September 30, 2013 and December 31, 2012

Note 4.       Loans Receivable and Allowance for Loan Losses, continued

The allocation of the allowance for loan losses by loan components (in thousands) at September 30, 2012 is as follows:

	1-4			1-4			Consumer			Commercial			Commercial
	Family			Family			Lot			1-4			Non			Commercial			Commercial			Commercial			Other
	RE			LOC			Loans			Family			Residential			Land Only			Construction			LOC			Non RE			Total
2012
Allowance for credit losses:
Three months ended September 30, 2012:
Beginning balance	$	1,334		$	796		$	976		$	1,499		$	1,019		$	887		$	-		$	48		$	116		$	6,675
Charge-offs		-			(204	)		(158	)		(61	)		-			(53	)		-			-			(46	)		(522	)
Recoveries		-			5			64			2			-			113			-			-			4			188
Provision		56			412			134			(107	)		(64	)		(42	)		1			4			49			443
Ending balance	$	1,390		$	1,009		$	1,016		$	1,333		$	955		$	905		$	1		$	52		$	123		$	6,784
Nine months ended September 30, 2012:
Beginning balance	$	1,346		$	764		$	1,176		$	1,901		$	1,283		$	2,111		$	202		$	144		$	235		$	9,162
Charge-offs		(139	)		(360	)		(440	)		(909	)		(401	)		(1,337	)		-			-			(64	)		(3,650	)
Recoveries		-			22			181			11			-			194			13			-			11			432
Provision		183			583			99			330			73			(63	)		(214	)		(92	)		(59	)		840
Ending balance	$	1,390		$	1,009		$	1,016		$	1,333		$	955		$	905		$	1		$	52		$	123		$	6,784
Ending balance: individually evaluated for impairment	$	630		$	549		$	389		$	710		$	223		$	300		$	-		$	-		$	22		$	2,823
Ending balance: collectively evaluated for impairment	$	760		$	460		$	627		$	623		$	732		$	605		$	1		$	52		$	101		$	3,961
Loans Receivables:
Ending balance	$	67,986		$	24,948		$	5,110		$	23,052		$	39,725		$	7,937		$	25		$	1,176		$	4,104		$	174,063
Ending balance: individually evaluated for impairment	$	7,890		$	1,109		$	947		$	10,246		$	8,417		$	2,673		$	-		$	141		$	747		$	32,170
Ending balance: collectively evaluated for impairment	$	60,096		$	23,839		$	4,163		$	12,806		$	31,308		$	5,264		$	25		$	1,035		$	3,357		$	141,893

The following table presents impaired loans by class of loan (in thousands) as of September 30, 2013:

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
2013
With no related allowance recorded:
1-4 family real estate	$	4,820	$	5,326	$	-	$	4,605	$	161
1-4 family lines of credit		461		918		-		385		16
Consumer lot loans		298		331		-		281		17
Commercial 1-4 family		3,649		4,685		-		3,212		155
Commercial non-residential		4,853		5,097		-		4,867		193
Commercial land only		1,196		2,578		-		1,117		63
Commercial lines of credit		100		100		-		100		4
Other non-real estate		407		494		-		440		33
		15,784		19,529		-		15,007		642
With an allowance recorded:
1-4 family real estate		2,523		2,672		281		2,956		87
1-4 family lines of credit		413		475		168		616		9
Consumer lot loans		417		417		218		484		13
Commercial 1-4 family		4,010		4,621		318		5,098		106
Commercial non-residential		2,608		2,618		549		2,595		92
Commercial land only		772		817		207		1,223		26
Commercial lines of credit		-		-		-		-		-
Other non-real estate		116		116		12		143		7
		10,859		11,736		1,753		13,115		340
Combined:
1-4 family real estate		7,343		7,998		281		7,561		248
1-4 family lines of credit		874		1,393		168		1,001		25
Consumer lot loans		715		748		218		765		30
Commercial 1-4 family		7,659		9,306		318		8,310		261
Commercial non-residential		7,461		7,715		549		7,462		285
Commercial land only		1,968		3,395		207		2,340		89
Commercial lines of credit		100		100		-		100		4
Other non-real estate		523		610		12		583		40
	$	26,643	$	31,265	$	1,753	$	28,122	$	982

13

Security Savings Bank, SSB and Subsidiary

Notes to Consolidated Financial Statements

September 30, 2013 and December 31, 2012

Note 4. Loans Receivable and Allowance for Loan Losses, continued

The following table presents impaired loans by class of loan (in thousands) as of December 31, 2012:

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
2012	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
1-4 family real estate	$	4,390	$	4,657	$	-	$	4,585	$	285
1-4 family lines of credit		308		316		-		316		-
Consumer lot loans		264		272		-		276		19
Commercial 1-4 family		2,774		3,654		-		3,583		205
Commercial non-residential		4,881		5,150		-		5,461		381
Commercial land only		1,037		2,159		-		1,087		134
Commercial lines of credit		100		100		-		100		5
Other non-real estate		472		609		-		473		17
		14,226		16,917		-		15,881		1,046
With an allowance recorded:
1-4 family real estate		3,349		3,398		649		3,389		171
1-4 family lines of credit		806		910		446		818		20
Consumer lot loans		542		544		344		551		18
Commercial 1-4 family		5,983		6,323		951		6,185		376
Commercial non-residential		2,530		2,535		303		2,581		129
Commercial land only		1,601		1,752		537		1,674		75
Commercial lines of credit		-		-		-		-		-
Other non-real estate		157		157		32		169		11
		14,968		15,619		3,262		15,367		800
Combined:
1-4 family real estate		7,739		8,055		649		7,974		456
1-4 family lines of credit		1,114		1,226		446		1,134		20
Consumer lot loans		806		816		344		827		37
Commercial 1-4 family		8,757		9,977		951		9,768		581
Commercial non-residential		7,411		7,685		303		8,042		510
Commercial land only		2,638		3,911		537		2,761		209
Commercial lines of credit		100		100		-		100		5
Other non-real estate		629		766		32		642		28
	$	29,194	$	32,536	$	3,262	$	31,248	$	1,846

Nonperforming loans and impaired loans are defined differently. As such, some loans may be included in both categories, whereas other loans may only be included in one category. The aging of loans receivable as of September 30, 2013 was as follows (in thousands).

													Recorded
													Investment
											Total		> 90 Days
	30-59 Days		60-89 Days		90 Days Plus		Total				Loans		And
2013	Past Due		Past Due		Past Due		Past Due		Current		Receivables		Accruing
1-4 family real estate	$	116	$	1,911	$	1,530	$	3,557	$	53,962	$	57,519	$	-
1-4 family lines of credit		625		-		693		1,318		20,761		22,079		-
Consumer lot loans		129		-		177		306		3,801		4,107		-
Commercial 1-4 family		870		165		1,759		2,794		13,996		16,790		-
Commercial non-residential		1		-		949		950		28,174		29,124		-
Commercial land only		352		-		294		646		5,155		5,801		-
Commercial construction		-		-		-		-		-		-		-
Commercial lines of credit		-		-		-		-		789		789		-
Other non-real estate		42		7		3		52		2,441		2,493		-
Total	$	2,135	$	2,083	$	5,405	$	9,623	$	129,079	$	138,702	$	-

14

Security Savings Bank, SSB and Subsidiary

Notes to Consolidated Financial Statements

September 30, 2013 and December 31, 2012

Note 4. Loans Receivable and Allowance for Loan Losses, continued

Nonperforming loans and impaired loans are defined differently. As such, some loans may be included in both categories, whereas other loans may only be included in one category. The aging of loans receivable as of December 31, 2012 was as follows (in thousands).

													Recorded
													Investment
											Total		> 90 Days
	30-59 Days		60-89 Days		90 Days Plus		Total				Loans		and
2012	Past Due		Past Due		Past Due		Past Due		Current		Receivables		Accruing
1-4 family real estate	$	4,851	$	1,976	$	1,990	$	8,817	$	53,928	$	62,745	$	229
1-4 family lines of credit		111		61		393		565		23,928		24,493		-
Consumer lot loans		65		36		185		286		4,427		4,713		-
Commercial 1-4 family		1,672		2,691		26		4,389		16,555		20,944		-
Commercial non-residential		1,134		485		593		2,212		32,126		34,338		-
Commercial land only		129		318		470		917		7,013		7,930		-
Commercial construction		-		-		-		-		1,263		1,263		-
Commercial lines of credit		-		-		-		-		2,968		2,968		-
Other non-real estate		107		3		476		586		5,433		6,019		1
Total	$	8,069	$	5,570	$	4,133	$	17,772	$	147,641	$	165,413	$	230

Credit Quality Indicators:

The Bank has established a standard risk grading (also referred to as loan grade) system to assist management and lenders in their analysis and supervision of the loan portfolio. Loan officers assign a grade to each credit at its inception; this grade is changed as required thereafter based on the borrower’s financial condition, payment performance, and other material information.

The Bank uses the following definitions for risk ratings:

1 - Highest Credit Quality	This grade is reserved for loans secured by cash collateral on deposit with no risk of principal deterioration.
2 - High Credit Quality	This grade is reserved for loans secured by readily marketable collateral, or loans within guidelines to borrowers with liquid financial statements.  A liquid financial statement is generally a financial statement with substantial liquid assets, particularly relative to the debts.  These loans have excellent sources of repayment, with no significant identifiable risk of collection, and conform in all respects to Bank policy, guidelines, underwriting standards, and Federal and State regulations (no exceptions of any kind).
3 - High Satisfactory Credit Quality	This grade is reserved for the Bank’s top quality loans.  These loans have excellent sources of repayment, with no significant identifiable risk of collection, and they conform to Bank policy, conform to underwriting standards, and conform to product guidelines.
4 - Satisfactory Credit Quality	This grade is given to acceptable loans.  These loans have adequate sources of repayment, with little identifiable risk of collection.
5 - Low Satisfactory Credit Quality	This grade is given to acceptable loans that show signs of weakness in either adequate sources of repayment or collateral but have demonstrated mitigating factors that minimize the risk of delinquency or loss.

15

Security Savings Bank, SSB and Subsidiary

Notes to Consolidated Financial Statements

September 30, 2013 and December 31, 2012

Note 4. Loans Receivable and Allowance for Loan Losses, continued

Credit Quality Indicators, continued

6 - Special Mention Special mention loans include the following characteristics:

· Loans within guidelines tolerances or with exceptions of any kind that have not been mitigated by other economic or credit factors.

· Extending loans that are currently performing satisfactorily but with potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Bank’s position at some future date. Potential weaknesses are the result of deviations from prudent lending practices.

· Loans where adverse economic conditions that develop subsequent to the loan origination that don’t jeopardize liquidation of the debt but do substantially increase the level of risk may also warrant this rating.

7 - Substandard	A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans classified as substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
	Such loans are not longer considered to be adequately protected due to the borrower’s declining net worth, lack of earnings capacity, declining collateral margins and/or unperfected collateral positions.  A possibility of loss of a portion of the loan balance cannot be ruled out.  The repayment ability of the borrower is marginal or weak and the loan may have exhibited excessive overdue status or extensions and/or renewals.
8 - Doubtful	Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbably.  However, these loans are not yet rated as loss because certain events may occur which would salvage the debt.
	The ability of the borrower to service the debt is extremely weak, overdue status is constant, the debt has been place on non-accrual status, and no definite repayment schedule exists.  Doubtful is a temporary grade where a loss is expected but is presently not quantified with any degree of accuracy.  Once the loss position is determined, the amount is charged off.
9 - Classified Loss	Loans classified Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted.  This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be effected in the future.

16

Security Savings Bank, SSB and Subsidiary

Notes to Consolidated Financial Statements

September 30, 2013 and December 31, 2012

Note 4. Loans Receivable and Allowance for Loan Losses, continued

													Doubtful
	Total			Pass Credits			Special Mention			Substandard			or Loss
September 30, 2013
1-4 family real estate	$	57,519		$	44,922		$	3,810		$	8,655		$	132
1-4 family lines of credit		22,079			15,696			4,058			2,197			128
Consumer lot loans		4,107			2,475			873			643			116
Commercial 1-4 family		16,790			4,585			1,601			8,422			2,182
Commercial non-residential		29,124			17,277			2,747			8,271			829
Commercial land only		5,801			2,398			1,421			1,534			448
Commercial construction		-			-			-			-			-
Commercial lines of credit		789			660			29			100			-
Other non-real estate		2,493			1,757			143			593			-
Total	$	138,702		$	89,770		$	14,682		$	30,415		$	3,835
		100	%		64	%		11	%		22	%		3	%

													Doubtful
	Total			Pass Credits			Special Mention			Substandard			or Loss
December 31, 2012
1-4 family real estate	$	62,745		$	51,500		$	2,448		$	8,797		$	-
1-4 family lines of credit		24,493			18,053			3,908			2,532			-
Consumer lot loans		4,713			2,969			891			853			-
Commercial 1-4 family		20,944			7,228			2,774			10,942			-
Commercial non-residential		34,338			18,844			5,014			10,480			-
Commercial land only		7,930			2,163			2,567			3,200			-
Commercial construction		1,263			1,254			9			-			-
Commercial lines of credit		2,968			2,691			137			140			-
Other non-real estate		6,019			4,368			491			1,160			-
Total	$	165,413		$	109,070		$	18,239		$	38,104		$	-
		100	%		66	%		11	%		23	%		-	%

Nonaccrual Loans (in thousands)

The loans in nonaccrual status as of September 30, 2013 and December 31, 2012 are as follows:

	2013		2012
1-4 family real estate	$	2,848	$	3,249
1-4 family lines of credit		1,070		645
Consumer lot loans		183		273
Commercial 1-4 family		2,753		1,046
Commercial non-residential		1,979		1,823
Commercial land only		868		1,145
Other non-real estate		306		503
Total	$	10,007	$	8,684

17

Security Savings Bank, SSB and Subsidiary

Notes to Consolidated Financial Statements

September 30, 2013 and December 31, 2012

Note 4. Loans Receivable and Allowance for Loan Losses, continued

Troubled Debt Restructurings

The following table is a summary of information related to loan modifications considered to be troubled debt restructurings during for the nine months ended September 30, 2013:

	2013
			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number		Recorded		Recorded
(Dollars in thousands)	of Contracts		Investment(1)		Investment(1)
Troubled Debt Restructurings
1-4 family real estate		2	$	148	$	148
Commercial non-residential		5		1,493		1,493
Commercial land only		2		276		276
Other non-real estate		1		21		21
		10	$	1,938	$	1,938

⁽¹⁾Recorded investment includes unpaid active principal outstanding, accrued interest, late charges and unearned deferred cost.

During the nine months ended September 30, 2013, the Bank modified 10 loans that were considered to be troubled debt restructurings and extended the terms for 1 of these loans. The interest rate was lowered for 4 loans. As of September 30, 2013, the Bank had a total of $21,652,872 in loans that were considered to be troubled debt restructurings of which $6,225,631 were on nonaccrual.

The following table is a summary of information related to loan modifications considered to be troubled debt restructurings during for the nine months ended September 30, 2012:

	2012
			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number		Recorded		Recorded
(Dollars in thousands)	of Contracts		Investment(1)		Investment(1)
Troubled Debt Restructurings
1-4 family real estate		5	$	447	$	447
1-4 family line of credit		1		197		197
Commercial 1-4 family		6		3,683		3,683
Commercial non-residential		9		2,872		2,872
Commercial land only		5		938		938
Other non-real estate		2		106		106
		28	$	8,243	$	8,243

⁽¹⁾Recorded investment includes unpaid active principal outstanding, accrued interest, late charges and unearned deferred cost.

During the nine months ended September 30, 2012, the Bank modified 28 loans that were considered to be troubled debt restructurings and extended the terms for 9 of these loans. The interest rate was lowered for 22 loans. As of September 30, 2012, the Bank had a total of $26,615,941 in loans that were considered to be troubled debt restructurings of which $6,253,472 were on nonaccrual.

During the nine months ended September 30, 2013, there were 7 loans totaling $2,194,186 that had previously been restructured within the previous twelve months that were in default. During the nine months ended September 30, 2012, there were no loans that had previously been restructured within the previous twelve months that were in default. Restructured loans are deemed to be in default if payments in accordance with the modified terms are not received within ninety days of the payment due date.

In the determination of the allowance for loan losses, management considers troubled debt restructurings to be impaired until the borrower proves collectability is likely based on payments received.

18

Security Savings Bank, SSB and Subsidiary

Notes to Consolidated Financial Statements

September 30, 2013 and December 31, 2012

Note 5. Premises and Equipment

Premises and equipment at September 30, 2013 and December 31, 2012 are summarized as follows:

	2013		2012
Land and improvements	$	3,599,621	$	3,969,084
Buildings and improvements		7,839,088		9,326,422
Furniture, fixtures and equipment		3,811,807		4,614,614
		15,250,516		17,910,120
Less accumulated depreciation		5,707,929		6,312,269
	$	9,542,587	$	11,597,851

Depreciation amounting to $301,338 and $430,776 is included in occupancy expense for the nine month periods ended September 30, 2013 and 2012, respectively.

During the first nine months of 2013, $562,497 of real estate was transferred from premises and equipment to real estate held for sale. During the first nine months of 2012, $643,422 of real estate was transferred from premises and equipment to real estate held for sale. During 2013 and 2012, the Bank removed several fully depreciated assets with a value of zero out of premises and equipment.

Note 6. Other Real Estate Owned

Transactions in other real estate for the nine months ended September 30, 2013 and 2012 are summarized below:

	2013			2012
Balance, beginning of period	$	10,301,128		$	17,195,398
Additions		1,183,435			2,655,836
Sales		(4,062,908	)		(4,747,345	)
Writedowns		(1,365,147	)		(2,904,649	)
Balance, end of period	$	6,056,508		$	12,199,240

Note 7. Federal Home Loan Bank Advances

Advances outstanding from the Federal Home Loan Bank of Atlanta totaled $40 million and $45 million at September 30, 2013 and December 31, 2012, respectively. Advances on this line consisted of the following at September 30, 2013 and December 31, 2012:

Maturing Date	Interest Rate			Balance
				2013		2012
February 13, 2013		3.58	%	$	-	$	5,000,000
February 3, 2015		3.86	%		9,000,000		9,000,000
June 24, 2015		3.71	%		1,000,000		1,000,000
May 4, 2017		4.71	%		5,000,000		5,000,000
June 5, 2017		4.93	%		5,000,000		5,000,000
July 25, 2017		5.00	%		10,000,000		10,000,000
September 11, 2017		3.71	%		10,000,000		10,000,000
				$	40,000,000	$	45,000,000

The weighted average interest rate of these advances at September 30, 2013 and December 31, 2012 was 4.34% and 4.26%, respectively.

19

Security Savings Bank, SSB and Subsidiary

Notes to Consolidated Financial Statements

September 30, 2013 and December 31, 2012

Note 7. Federal Home Loan Bank Advances, continued

At September 30, 2013 and December 31, 2012, the Bank had entered into a security agreement with a blanket floating lien pledging all of its qualifying real-estate loans to secure actual or potential borrowings. Under the agreement with the FHLB, the Bank must have collateral, free of encumbrances, with unpaid principal balances at least equal to, when discounted at 75% of the unpaid principal balances, 100% of the Bank’s total advances outstanding from the FHLB.

Note 8. Employee Benefit Plans

Historically, the Bank has sponsored a 401 (k) contribution plan which covered substantially all employees. The employer may contribute 50% of the employee’s first 6% of salary reduction contribution and/or a profit sharing contribution. The profit sharing contributions were at the discretion of the Board. There were no salary-based or profit sharing contributions to the plan in 2013 or 2012. Effective July 31, 2013, the 401(k) plan was terminated.

Note 9. Regulatory Matters

The Bank is subject to various regulatory capital requirements administered by the Federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements.

On July 28, 2010, the Bank entered into a Consent Order (“Order”) with the FDIC and the North Carolina Commissioner of Banks. The Order seeks to enhance the Bank’s existing practices and procedures in the areas of management oversight, strategic and capital planning, credit risk management, credit underwriting, liquidity, funds management, and information technology.

In addition, the FDIC has established Individual Minimum Capital Ratio levels of tier 1 and total capital for the Bank of at least 8.0% and 10.0% respectively, that are higher than the minimum and well capitalized ratios applicable to all banks. The Bank was not in compliance with these ratios at September 30, 2013 or December 31, 2012.

A summary of the Bank’s actual capital components, those required for capital adequacy and those to be considered well capitalized under the Order at September 30, 2013 and December 31, 2012, follows (in thousands):

											Minimum
						Minimum for					To Be Well
						Capital Adequacy					Capitalized Under
	Actual					Purposes					Consent Order
	Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2013
Total capital (to risk-weighted assets)	$	5,861		4.68	%	$	10,028		8.00	%	$	12,535		10.00	%
Tier 1 capital (to risk-weighted assets)	$	4,257		3.40	%	$	5,014		4.00	%		n/a		n/a
Tier 1 capital (to average assets)	$	4,257		1.97	%	$	8,651		4.00	%	$	17,301		8.00	%
December 31, 2012
Total capital (to risk-weighted assets)	$	8,123		5.31	%	$	12,246		8.00	%	$	15,308		10.00	%
Tier 1 capital (to risk-weighted assets)	$	6,148		4.02	%	$	6,123		4.00	%		n/a		n/a
Tier 1 capital (to average assets)	$	6,148		2.41	%	$	10,191		4.00	%	$	20,383		8.00	%

20

Security Savings Bank, SSB and Subsidiary

Notes to Consolidated Financial Statements

September 30, 2013 and December 31, 2012

Note 10. Off-Balance Sheet Risk

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of these instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank, upon extension of credit is based on management’s credit evaluation of the borrower. Collateral obtained varies, but may include real estate, stocks, bonds, and certificates of deposit.

A summary of the contract amounts of the Bank’s exposure to off-balance sheet risk as of September 30, 2013 and December 31, 2012 is as follows (in thousands):

	2013		2012
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	2,157	$	2,483
Commitments to fund commercial real estate, construction and land development loans		874		913
Other unused commitments		14,914		17,175

Note 11. Fair Values

Financial instruments include cash and due from banks, federal funds sold, interest-earning deposits with banks, restricted cash, investment securities, loans, stock in the Federal Home Loan Bank of Atlanta, corporate-owned life insurance, deposit accounts, advances from the Federal Home Loan Bank, and accrued interest. Fair value estimates are made at a specific moment in 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 at one time the Bank’s entire holdings of a particular financial instrument. Because no active market readily exists for a portion of the Bank’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, 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 assumptions could significantly affect the estimates.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and Due from Banks, Federal Funds Sold, Interest-Earning Deposits with Banks, and Restricted Cash

The carrying amounts for cash and due from banks, federal funds sold, interest-earning deposits with banks, and restricted cash approximate fair value because of the short maturities of those instruments.

Investment Securities

Fair value for investment securities equals quoted market price if such information is available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.

21

Security Savings Bank, SSB and Subsidiary

Notes to Consolidated Financial Statements

September 30, 2013 and December 31, 2012

Note 11. Fair Values, continued

Loans

The fair value of other types of loans represents an estimate of the discounted future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Stock in the Federal Home Loan Bank of Atlanta

The fair value for FHLB stock is its carrying value, since this is the amount for which it could be redeemed. There is no active market for this stock, and the Bank is required to maintain a minimum balance based on the unpaid principal of home mortgage loans.

Corporate-Owned Life Insurance

The carrying value of life insurance approximates fair value because this investment is carried at cash surrender value, as determined by the insurer.

Deposits

The fair value of demand deposits is the amount payable on demand at the reporting date. The fair value of time deposits represents an estimate of the discounted future cash flows for the rates currently offered for instruments of similar remaining maturities.

Advances from the Federal Home Loan Bank

The fair value of these advances represents an estimate of the discounted future cash flows for current rates at which borrowings of similar maturity could be obtained.

Accrued Interest

The carrying amount of accrued interest approximates fair value.

Financial Instruments with Off-Balance Sheet Risk

With regard to financial instruments with off-balance sheet risk discussed in Note 10, it is not practicable to estimate the fair value of future financing commitments.

The carrying amounts and estimated fair values of the Bank’s financial instruments, none of which are held for trading purposes, are as follows at September 30, 2013 and December 31, 2012 (in thousands):

	September 30, 2013				December 31, 2012
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial Assets
Cash and due from banks	$	1,074	$	1,074	$	671	$	671
Interest-earning deposits with banks		37,175		37,175		35,117		35,117
Restricted cash		16,806		16,806		10,282		10,282
Investment securities held to maturity		1,450		1,479		7,999		8,053
Loans, net		134,188		140,770		158,530		166,306
Stock in the Federal Home Loan Bank		2,090		2,090		2,490		2,490
Accrued interest receivable		534		534		762		762
Corporate-owned life insurance		1,443		1,443		1,482		1,482
Financial Liabilities
Deposits	$	167,180	$	168,075	$	189,138	$	190,151
Federal Home Loan Bank Advances		40,000		45,110		45,000		50,749
Accrued interest payable		228		228		246		246

22

Security Savings Bank, SSB and Subsidiary

Notes to Consolidated Financial Statements

September 30, 2013 and December 31, 2012

Note 11. Fair Values, continued

Measuring Assets and Liabilities at Fair Value

Generally accepted accounting principles related to fair value measurements and disclosures provide a framework for measuring and disclosing fair value under generally accepted accounting principles. It requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, available for sale investment securities) or on a nonrecurring basis (for example, impaired loans).

The guidance defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The guidance also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

Fair Value Hierarchy

Generally accepted accounting principles related to fair value measurements and disclosures establish three levels of inputs that may be used to measure fair value:

Level 1 Valuation is based upon quoted prices for identical instruments traded in active markets.

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

Level 3 Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include the use of option pricing models, discounted cash flow models and similar techniques.

Loans

The Bank does not record loans at fair value on a recurring basis. From time to time, a loan is considered impaired. Loans which are deemed to be impaired are valued according to accounting guidance for receivables. The fair value of impaired loans is estimated using one of several methods, including collateral value, liquidation value, and discounted cash flows. When the fair value of collateral is based on an observable market price or a current appraised value, the Bank records the impaired loan as Level 2. If the fair value of the loan is based on criteria other than observable market prices or current appraised value, the loan is recorded as Level 3.

Foreclosed Assets

Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets.  Foreclosed assets are carried at the lower of the carrying value or fair value.  Fair value is based upon independent observable market prices or appraised values of the collateral, which the Bank considers to be level 2 inputs. When the appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Bank records the foreclosed asset as nonrecurring Level 3.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

There were no assets or liabilities carried at fair value on a recurring basis at September 30, 2013 or December 31, 2012.

23

Security Savings Bank, SSB and Subsidiary

Notes to Consolidated Financial Statements

September 30, 2013 and December 31, 2012

Note 11. Fair Values, continued

Assets and Liabilities Recorded at Fair Value on a Non-Recurring Basis

The Bank may be required from time to time to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets carried at fair value on a nonrecurring basis are included in the table below.

(Dollars in thousands)	Total		Level 1		Level 2		Level 3
September 30, 2013
Impaired loans, net of specific reserves	$	24,890	$	-	$	24,890	$	-
Other real estate owned		6,057		-		6,057		-
Real estate held for sale		1,785		-		1,785		-
Total assets at fair value	$	32,732	$	-	$	32,732	$	-
December 31, 2012
Impaired loans, net of specific reserves	$	25,932	$	-	$	25,932	$	-
Other real estate owned		10,301		-		10,301		-
Real estate held for sale		1,768		-		1,768		-
Total assets at fair value	$	38,001	$	-	$	38,001	$	-

The Bank has no liabilities carried at fair value or measured at fair value on a nonrecurring basis.

Note 12. Legal Contingencies

The Bank is party to various legal actions normally associated with financial institutions, the aggregate effect of which, in management’s opinion, would not be material to the financial condition or results of operations of the Bank.

Note 13. Subsequent Events

Effective October 1, 2013, NewBridge Bank acquired the assets and liabilities of the Bank in a transaction effected pursuant to an order of the North Carolina Commissioner of Banks. No shares were issued or cash exchanged in the transaction, and the merger was not subject to member approval.

Management has evaluated events occurring subsequent to the balance sheet date through December 10, 2013 which is the date these financial statements were available to be issued. Other than the transaction noted above, there were no events identified as a result of this evaluation requiring adjustment or disclosure.

24