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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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

 

 

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.

 

 

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.

 

 

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.

 

 

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

 

 

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

 

 

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

 

 

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			$	-

 

 

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.

 

 

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.

 

 

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

 

 

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.

 

 

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.

 

 

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	%

 

  

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.

 

 

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

 

 

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.

 

 

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.