NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1.
|
BASIS OF PRESENTATION
|
The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and therefore, do not include all disclosures required by generally accepted accounting principles for a complete presentation of financial statements. In the opinion of management, the consolidated financial statements contain all adjustments necessary to present fairly the financial condition of Surrey Bancorp, (the “Company), as of June 30, 2016, the results of its operations and comprehensive income for the three and six months ended June 30, 2016 and 2015, and its changes in stockholders’ equity and cash flows for the six months ended June 30, 2016 and 2015. These adjustments are of a normal and recurring nature. The results of operations for the six months ended June 30, 2016, are not necessarily indicative of the results expected for the full year. These consolidated financial statements should be read in conjunction with the Company’s audited financial statements and related disclosures for the year ended December 31, 2015, included in the Company’s Form 10-K. The balance sheet at December 31, 2015, has been taken from the audited financial statements at that date.
Surrey Bancorp began operation on May 1, 2003 and was created for the purpose of acquiring all the outstanding shares of common stock of Surrey Bank & Trust (“the Bank”). Stockholders of the bank received six shares of Surrey Bancorp common stock for every five shares of Surrey Bank & Trust common stock owned. The Company is subject to regulation by the Federal Reserve.
Surrey Bank & Trust was organized and incorporated under the laws of the State of North Carolina on July 15, 1996 and commenced operations on July 22, 1996. The Bank currently serves Surry County, North Carolina and Patrick County, Virginia and surrounding areas through five banking offices. As a state chartered bank, which is not a member of the Federal Reserve, the Bank is subject to regulation by the State of North Carolina Banking Commission and the Federal Deposit Insurance Corporation.
Surrey Investment Services, Inc., (“Subsidiary”) was organized and incorporated under the laws of the State of North Carolina on February 10, 1998. The subsidiary provides insurance services through SB&T Insurance and investment advice and brokerage services through LPL Financial.
On July 31, 2000, Surrey Bank & Trust formed Freedom Finance, LLC, a subsidiary operation specializing in the purchase of sales finance contracts from local automobile dealers.
The accounting and reporting policies of the Company, the Bank, and its subsidiaries follow generally accepted accounting principles and general practices within the financial services industry. Following is a summary of the more significant policies.
Critical Accounting Policies
The notes to the audited consolidated financial statements for the year ended December 31, 2015 contain a summary of the significant accounting policies. The Company believes our policies with respect to the methodology for the determination of the allowance for loan losses, and asset impairment judgments, including the recoverability of intangible assets involve a higher degree of complexity and require management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could cause reported results to differ materially. These critical policies and their application are periodically reviewed with the Audit Committee and our Board of Directors. See our Annual Report on Form 10-K for full details on critical accounting policies.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, the Bank and the subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
SURREY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
|
BASIS OF PRESENTATION, CONTINUED
|
Presentation of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents includes cash and amounts due from depository institutions (including cash items in process of collection). Overnight interest bearing deposits and federal funds sold are shown separately. Federal funds purchased are shown with securities sold under agreements to repurchase.
Investment Securities
Investments classified as available for sale are intended to be held for indefinite periods of time and include those securities that management may employ as part of asset/liability strategy or that may be sold in response to changes in interest rates, prepayments, regulatory capital requirements or similar factors. These securities are carried at fair value and are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments or significant other observable inputs.
Investment securities classified as held to maturity are those debt securities that the Bank has the ability and intent to hold to maturity. Accordingly, these securities are carried at cost adjusted for amortization of premiums and accretion of discount, computed by the interest-method over their contractual lives.
At June 30, 2016
and December 31, 2015, the Bank had no investments classified as held to maturity.
Loans Held for Sale
The Bank originates and holds Small Business Administration (SBA) and United States Department of Agriculture (USDA) guaranteed loans in its portfolio in the normal course of business. Occasionally, the Bank sells the guaranteed portions of these loans into the secondary market. The loans are generally variable rate loans, which eliminates the market risk to the Bank and are therefore carried at cost. Fixed rate loans are carried at the lower of cost or market. The Bank recognizes gains on the sale of the guaranteed portion upon the consummation of the transaction. The Bank plans to continue to originate guaranteed loans for sales, however no such loans were funded and held for sale at June 30, 2016 and December 31, 2015.
Loans Receivable
Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding principal amount adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or cost on originated loans and unamortized premiums or discounts on purchased loans.
Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan using the interest method. Discounts and premiums on any purchased residential real estate loans are amortized to income using the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. Discounts and premiums on any purchased consumer loans are recognized over the expected lives of the loans using methods that approximate the interest method.
Interest is accrued and credited to income based on the principal amount outstanding. The accrual of interest on impaired loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due. When the interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. Payments received on nonaccrual loans are first applied to principal and any residual amounts are then applied to interest. When facts and circumstances indicate the borrower has regained the ability to meet the required payments, the loan is returned to accrual status. Past due loans are determined on the basis of contractual terms.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
|
BASIS OF PRESENTATION, CONTINUED
|
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures.
Recent Accounting Pronouncements
The following is a summary of recent authoritative pronouncements:
In January 2016, the FASB amended the Financial Instruments topic of the Accounting Standards Codification to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will apply the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values will be applied prospectively to equity investments that exist as of the date of adoption of the amendments. The Company does not expect these amendments to have a material effect on its financial statements.
In February 2016, the FASB issued new guidance to change accounting for leases and that will generally require most leases to be recognized on the balance sheet. The new lease standard only contains targeted changes to accounting by lessors, however, lessees will be required to recognize most leases in their balance sheets as lease liabilities for lease payments and right-of-use assets representing the lessee's rights to use the underlying assets for the lease terms for lease arrangements longer than 12 months. Under this approach, a lessee will account for most existing capital/finance leases as Type A leases and most existing operating leases as Type B leases. Type A and Type B leases have unique accounting and disclosure requirements. Existing sale-leaseback guidance, including guidance for real estate, will be replaced with a new model applicable to both lessees and lessors The new guidance will be effective for fiscal years (and interim periods within those fiscal years) beginning after December 15, 2018. Early adoption is permitted for all companies and organizations. Management is currently analyzing the impact of the adoption of this guidance on the Company's financial statements, including assessing changes that might be necessary to information technology systems, processes and internal controls to capture new data and address changes in financial reporting.
SURREY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
|
BASIS OF PRESENTATION, CONTINUED
|
Recent Accounting Pronouncements, continued
In March 2016, the FASB issued guidance to simplify several aspects of the accounting for share-based payment award transactions including the income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. Additionally, the guidance simplifies two areas specific to entities other than public business entities allowing them apply a practical expedient to estimate the expected term for all awards with performance or service conditions that have certain characteristics and also allowing them to make a one-time election to switch from measuring all liability-classified awards at fair value to measuring them at intrinsic value. The amendments will be effective for the Company for annual periods beginning after December 15, 2016 and interim periods within those annual periods. The Company does not expect these amendments to have a material effect on its financial statements.
In April 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify the implementation guidance on principal versus agent considerations and address how an entity should assess whether it is the principal or the agent in contracts that include three or more parties.
The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.
In May 2016, the FASB amended the Revenue from Contracts with Customers topic of the Accounting Standards Codification to clarify guidance related to collectability, noncash consideration, presentation of sales tax, and transition. The amendments will be effective for the Company for reporting periods beginning after December 15, 2017. The Company does not expect these amendments to have a material effect on its financial statements.
In June 2016, the FASB issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. The amendments will be effective for the Company for reporting periods beginning after December 15, 2020-public business entities that are not SEC filers; annual periods beginning after December 15, 2020, and interim periods within annual reporting periods beginning after December 15, 2021-all other entities. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
Subsequent Events
Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. Recognized subsequent events are events or transactions that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements. Non-recognized subsequent events are events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date. Except for the transaction below, management has reviewed events occurring through the date the financial statements were issued and no subsequent events have occurred requiring accrual or disclosure.
Subsequent to June 30, 2016, Freedom Finance, LLC entered into an agreement to sell its outstanding loans receivable, amounting to $1,057,282, to a third party. The agreement sets a price at 90% of the loan value with other stipulations regarding past due accounts. The recapture of the reserve associated with these loans will approximate the 10% discount negotiated in the contract. Upon the culmination of the transaction, including the settlement for delinquent accounts the operations of Freedom Finance, LLC will be discontinued.
SURREY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Debt and equity securities have been classified in the balance sheets according to management’s intent. The amortized costs of securities available for sale and their approximate fair values at June 30, 2016 and December 31, 2015 follow:
|
|
Amortized
Cost
|
|
|
Unrealized
Gains
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored enterprises
|
|
$
|
4,000,000
|
|
|
$
|
2,825
|
|
|
$
|
-
|
|
|
$
|
4,002,825
|
|
Mortgage-backed securities
|
|
|
16,548
|
|
|
|
436
|
|
|
|
-
|
|
|
|
16,984
|
|
Corporate bonds
|
|
|
300,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
300,000
|
|
|
|
$
|
4,316,548
|
|
|
$
|
3,261
|
|
|
$
|
-
|
|
|
$
|
4,319,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored enterprises
|
|
$
|
4,498,227
|
|
|
$
|
3,130
|
|
|
$
|
10,117
|
|
|
$
|
4,491,240
|
|
Mortgage-backed securities
|
|
|
20,233
|
|
|
|
446
|
|
|
|
-
|
|
|
|
20,679
|
|
Corporate bonds
|
|
|
300,000
|
|
|
|
-
|
|
|
|
300
|
|
|
|
299,700
|
|
Equities and mutual funds
|
|
|
563,321
|
|
|
|
14,644
|
|
|
|
48,841
|
|
|
|
529,124
|
|
|
|
$
|
5,381,781
|
|
|
$
|
18,220
|
|
|
$
|
59,258
|
|
|
$
|
5,340,743
|
|
At June 30, 2016 and December 31, 2015, substantially all government-sponsored enterprises securities were pledged as collateral on public deposits and for other purposes as required or permitted by law. The mortgage-backed securities were pledged to the Federal Home Loan Bank.
Maturities of mortgage-backed bonds are stated based on contractual maturities. Actual maturities of these bonds may vary as the underlying mortgages are prepaid. The investment in equities and mutual funds by nature have no maturity date and are classified as due in one year or less. The scheduled maturities of securities (all available for sale) at June 30, 2016, were as follows:
|
|
Amortized
Cost
|
|
|
Fair
Value
|
|
Due in one year or less
|
|
$
|
500,000
|
|
|
$
|
500,015
|
|
Due after one year through five years
|
|
|
3,808,872
|
|
|
|
3,811,838
|
|
Due after five years through ten years
|
|
|
805
|
|
|
|
831
|
|
Due after ten years
|
|
|
6,871
|
|
|
|
7,125
|
|
|
|
$
|
4,316,548
|
|
|
$
|
4,319,809
|
|
There were no unrealized investment losses at June 30, 2016. The following table shows investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at December 31, 2015. These unrealized losses on investment securities are a result of volatility in interest rates which relate to government-sponsored enterprises and corporate bonds issued by other banks and market volatility as it relates to equity and mutual fund investments at December 31, 2015.
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
Fair
Value
|
|
|
Unrealized
Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government-sponsored enterprises
|
|
$
|
2,488,110
|
|
|
$
|
10
,117
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,488,110
|
|
|
$
|
10,117
|
|
Corporate bonds
|
|
|
-
|
|
|
|
-
|
|
|
|
299,700
|
|
|
|
300
|
|
|
|
299,700
|
|
|
|
300
|
|
Equities and mutual funds
|
|
|
63,865
|
|
|
|
22,785
|
|
|
|
41,140
|
|
|
|
26,056
|
|
|
|
105,005
|
|
|
|
48,841
|
|
|
|
$
|
2,551,975
|
|
|
$
|
32,902
|
|
|
$
|
340,840
|
|
|
$
|
26,356
|
|
|
$
|
2,892,815
|
|
|
$
|
59,258
|
|
SURREY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2.
|
SECURITIES, CONTINUED
|
Management considers the nature of the investment, the underlying causes of the decline in the market value and the severity and duration of the decline in market value in determining if impairment is other than temporary. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Based upon this evaluation, there are no securities in the portfolio at June 30, 2016, with unrealized losses
The Company had realized losses of $33,127 from the sales of equity and mutual fund investment securities for the six month period ended June 30, 2016, and realized gains of $4,376 from the sales of equity and mutual fund investment securities for the six month periods ended June 30, 2015. Total proceeds from the sales amounted to $530,710 and $11,135 in 2016 and 2015, respectively.
NOTE 3.
|
EARNINGS PER COMMON SHARE
|
Basic earnings per common share for the three months ended June 30, 2016 and 2015 were calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period.
The computation of diluted earnings per common share is similar to the computation of basic earnings per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if dilutive potential common shares had been issued. The numerator is adjusted for any changes in income or loss that would result from the assumed conversion of those potential common shares. The potential dilutive shares are represented by common stock options and by the Series A and D convertible preferred stock. Each share of the Series A preferred is convertible into 2.2955 shares of common stock. Each share of Series D preferred is convertible into 1.10 shares of common stock.
NOTE 4.
|
COMMITMENTS AND LETTERS OF CREDIT
|
At June 30, 2016, the Company had commitments to extend credit, including unused lines of credit of approximately $54,082,000 and letters of credit outstanding of $1,940,837.
The major components of loans in the balance sheets at June 30, 2016 and December 31, 2015 are below.
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Commercial
|
|
$
|
54,296,937
|
|
|
$
|
51,930,870
|
|
Real estate:
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
|
9,334,109
|
|
|
|
9,669,380
|
|
Residential, 1-4 families
|
|
|
44,070,693
|
|
|
|
43,830,689
|
|
Residential, 5 or more families
|
|
|
1,100,398
|
|
|
|
1,155,535
|
|
Farmland
|
|
|
6,648,149
|
|
|
|
6,043,944
|
|
Nonfarm, nonresidential
|
|
|
90,222,849
|
|
|
|
82,595,636
|
|
Agricultural
|
|
|
1,444,955
|
|
|
|
1,609,150
|
|
Consumer, net of discounts of $19,804 in 2016 and $11,950 in 2015
|
|
|
4,407,255
|
|
|
|
4,532,179
|
|
|
|
|
211,525,345
|
|
|
|
201,367,383
|
|
Deferred loan origination costs, net of (fees)
|
|
|
239,268
|
|
|
|
164,420
|
|
|
|
|
211,764,613
|
|
|
|
201,531,803
|
|
Allowance for loan losses
|
|
|
(3,846,517
|
)
|
|
|
(3,626,908
|
)
|
|
|
$
|
207,918,096
|
|
|
$
|
197,904,895
|
|
SURREY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Residential, 1-4 family loans pledged as collateral against FHLB advances approximated $12,200,000 and $12,691,000 at June 30, 2016 and December 31, 2015, respectively.
NOTE 6.
|
ALLOWANCE FOR LOAN LOSSES
|
The activity of the allowance for loan losses by loan components during the six months ended June 30, 2016 and 2015 was as follows:
|
|
Construction
&
Development
|
|
|
1-4 Family
Residential
|
|
|
Nonfarm,
Nonresidential
|
|
|
Commercial
&
Industrial
|
|
|
Consumer
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
150,400
|
|
|
$
|
790,200
|
|
|
$
|
1,020,400
|
|
|
$
|
1,361,814
|
|
|
$
|
177,894
|
|
|
$
|
126,200
|
|
|
$
|
3,626,908
|
|
Charge-offs
|
|
|
-
|
|
|
|
(62,665
|
)
|
|
|
(74,876
|
)
|
|
|
(5,129
|
)
|
|
|
(26,783
|
)
|
|
|
(33,514
|
)
|
|
|
(202,967
|
)
|
Recoveries
|
|
|
-
|
|
|
|
7,050
|
|
|
|
6,116
|
|
|
|
187,036
|
|
|
|
4,490
|
|
|
|
4,643
|
|
|
|
209,835
|
|
Provision
|
|
|
(3,062
|
)
|
|
|
86,293
|
|
|
|
288,620
|
|
|
|
(225,950
|
)
|
|
|
(76,271
|
)
|
|
|
143,111
|
|
|
|
212,741
|
|
Ending balance
|
|
$
|
147,338
|
|
|
$
|
821,378
|
|
|
$
|
1,240,260
|
|
|
$
|
1,317,771
|
|
|
$
|
79,330
|
|
|
$
|
240,440
|
|
|
$
|
3,846,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10,625
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10,625
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
147,338
|
|
|
$
|
821,378
|
|
|
$
|
1,240,260
|
|
|
$
|
1,307,146
|
|
|
$
|
79,330
|
|
|
$
|
240,440
|
|
|
$
|
3,835,892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
9,334,109
|
|
|
$
|
44,070,693
|
|
|
$
|
90,222,849
|
|
|
$
|
54,296,937
|
|
|
$
|
4,407,255
|
|
|
$
|
9,193,502
|
|
|
$
|
211,525,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
9,686
|
|
|
$
|
1,231,595
|
|
|
$
|
2,086,625
|
|
|
$
|
2,081,104
|
|
|
$
|
-
|
|
|
$
|
5,543
|
|
|
$
|
5,414,553
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
9,324,423
|
|
|
$
|
42,839,098
|
|
|
$
|
88,136,224
|
|
|
$
|
52,215,833
|
|
|
$
|
4,407,255
|
|
|
$
|
9,187,959
|
|
|
$
|
206,110,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
160,100
|
|
|
$
|
798,199
|
|
|
$
|
1,067,315
|
|
|
$
|
1,301,900
|
|
|
$
|
158,750
|
|
|
$
|
68,400
|
|
|
$
|
3,554,664
|
|
Charge-offs
|
|
|
-
|
|
|
|
(119,738
|
)
|
|
|
-
|
|
|
|
(14,308
|
)
|
|
|
(63,747
|
)
|
|
|
-
|
|
|
|
(197,793
|
)
|
Recoveries
|
|
|
-
|
|
|
|
1,470
|
|
|
|
556
|
|
|
|
355,079
|
|
|
|
16,089
|
|
|
|
-
|
|
|
|
373,194
|
|
Provision
|
|
|
(79,500
|
)
|
|
|
99,807
|
|
|
|
(20,437
|
)
|
|
|
(109,264
|
)
|
|
|
61,398
|
|
|
|
4,500
|
|
|
|
(43,496
|
)
|
Ending balance
|
|
$
|
80,600
|
|
|
$
|
779,738
|
|
|
$
|
1,047,434
|
|
|
$
|
1,533,407
|
|
|
$
|
172,490
|
|
|
$
|
72,900
|
|
|
$
|
3,686,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
-
|
|
|
$
|
5,538
|
|
|
$
|
82,334
|
|
|
$
|
130,207
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
218,079
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
80,600
|
|
|
$
|
774,200
|
|
|
$
|
965,100
|
|
|
$
|
1,403,200
|
|
|
$
|
172,490
|
|
|
$
|
72,900
|
|
|
$
|
3,468,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
5,003,033
|
|
|
$
|
42,429,891
|
|
|
$
|
81,471,018
|
|
|
$
|
54,582,484
|
|
|
$
|
4,453,977
|
|
|
$
|
5,556,315
|
|
|
$
|
193,496,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance: individually evaluated for impairment
|
|
$
|
12,364
|
|
|
$
|
902,831
|
|
|
$
|
2,638,166
|
|
|
$
|
1,001,378
|
|
|
$
|
-
|
|
|
$
|
238,369
|
|
|
$
|
4,793,108
|
|
Ending balance: collectively evaluated for impairment
|
|
$
|
4,990,669
|
|
|
$
|
41,527,060
|
|
|
$
|
78,832,852
|
|
|
$
|
53,581,106
|
|
|
$
|
4,453,977
|
|
|
$
|
5,317,946
|
|
|
$
|
188,703,610
|
|
SURREY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6.
|
ALLOWANCE FOR LOAN LOSSES, CONTINUED
|
The following table presents impaired loans individually evaluated by class of loan as of June 30, 2016 and December 31, 2015 and the recognized interest income per the related period:
|
|
Recorded
Investment
|
|
|
Unpaid
Principal
Balance
|
|
|
Related
Allowance
|
|
|
Average
Recorded
Investment
|
|
|
Interest
Income
Recognized
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and development
|
|
$
|
9,686
|
|
|
$
|
9,686
|
|
|
$
|
-
|
|
|
$
|
10,050
|
|
|
$
|
425
|
|
1-4 family residential
|
|
|
1,231,595
|
|
|
|
1,303,749
|
|
|
|
-
|
|
|
|
1,238,366
|
|
|
|
17,332
|
|
Nonfarm, nonresidential
|
|
|
2,086,625
|
|
|
|
2,086,625
|
|
|
|
-
|
|
|
|
2,355,586
|
|
|
|
53,280
|
|
Commercial and industrial
|
|
|
2,070,479
|
|
|
|
2,073,174
|
|
|
|
-
|
|
|
|
2,070,171
|
|
|
|
72,592
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other loans
|
|
|
5,543
|
|
|
|
11,086
|
|
|
|
-
|
|
|
|
5,543
|
|
|
|
-
|
|
|
|
|
5,403,928
|
|
|
|
5,484,320
|
|
|
|
-
|
|
|
|
5,679,716
|
|
|
|
143,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
1-4 family residential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Nonfarm, nonresidential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
10,625
|
|
|
|
10,625
|
|
|
|
10,625
|
|
|
|
10,654
|
|
|
|
169
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
10,625
|
|
|
|
10,625
|
|
|
|
10,625
|
|
|
|
10,654
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and development
|
|
|
9,686
|
|
|
|
9,686
|
|
|
|
-
|
|
|
|
10,050
|
|
|
|
425
|
|
1-4 family residential
|
|
|
1,231,595
|
|
|
|
1,303,749
|
|
|
|
-
|
|
|
|
1,238,366
|
|
|
|
17,332
|
|
Nonfarm, nonresidential
|
|
|
2,086,625
|
|
|
|
2,086,625
|
|
|
|
|
|
|
|
2,355,586
|
|
|
|
53,280
|
|
Commercial and industrial
|
|
|
2,081,104
|
|
|
|
2,083,799
|
|
|
|
10,625
|
|
|
|
2,080,825
|
|
|
|
72,761
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other loans
|
|
|
5,543
|
|
|
|
11,086
|
|
|
|
-
|
|
|
|
5,543
|
|
|
|
-
|
|
|
|
$
|
5,414,553
|
|
|
$
|
5,494,945
|
|
|
$
|
10,625
|
|
|
$
|
5,690,370
|
|
|
$
|
143,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With no related allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and development
|
|
$
|
11,061
|
|
|
$
|
11,061
|
|
|
$
|
-
|
|
|
$
|
11,408
|
|
|
$
|
1,005
|
|
1-4 family residential
|
|
|
966,420
|
|
|
|
975,909
|
|
|
|
-
|
|
|
|
966,971
|
|
|
|
47,320
|
|
Nonfarm, nonresidential
|
|
|
2,640,143
|
|
|
|
2,640,143
|
|
|
|
-
|
|
|
|
2,542,346
|
|
|
|
99,820
|
|
Commercial and industrial
|
|
|
1,676,119
|
|
|
|
1,676,119
|
|
|
|
-
|
|
|
|
1,647,548
|
|
|
|
86,843
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other loans
|
|
|
11,085
|
|
|
|
11,085
|
|
|
|
-
|
|
|
|
11,085
|
|
|
|
591
|
|
|
|
|
5,304,828
|
|
|
|
5,314,317
|
|
|
|
-
|
|
|
|
5,179,358
|
|
|
|
235,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and development
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
1-4 family residential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Nonfarm, nonresidential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
592,557
|
|
|
|
592,557
|
|
|
|
45,014
|
|
|
|
592,557
|
|
|
|
37,304
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
592,557
|
|
|
|
592,557
|
|
|
|
45,014
|
|
|
|
592,557
|
|
|
|
37,304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and development
|
|
|
11,061
|
|
|
|
11,061
|
|
|
|
-
|
|
|
|
11,408
|
|
|
|
1,005
|
|
1-4 family residential
|
|
|
966,420
|
|
|
|
975,909
|
|
|
|
-
|
|
|
|
966,971
|
|
|
|
47,320
|
|
Nonfarm, nonresidential
|
|
|
2,640,143
|
|
|
|
2,640,143
|
|
|
|
-
|
|
|
|
2,542,346
|
|
|
|
99,820
|
|
Commercial and industrial
|
|
|
2,268,676
|
|
|
|
2,268,676
|
|
|
|
45,014
|
|
|
|
2,240,105
|
|
|
|
124,147
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other loans
|
|
|
11,085
|
|
|
|
11,085
|
|
|
|
-
|
|
|
|
11,085
|
|
|
|
591
|
|
|
|
$
|
5,897,385
|
|
|
$
|
5,906,874
|
|
|
$
|
45,014
|
|
|
$
|
5,771,915
|
|
|
$
|
272,883
|
|
SURREY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6.
|
ALLOWANCE FOR LOAN LOSSES, CONTINUED
|
The following presents by class, an aging analysis of the recorded investment in loans.
|
|
30-59 Days
Past Due
|
|
|
60-89 Days
Past Due
|
|
|
90 Days Plus
Past Due
|
|
|
Total
Past Due
|
|
|
Current
|
|
|
Total
Financing
Receivables
|
|
|
Recorded
Investment
> 90 Days
and
Accruing
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and development
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,334,109
|
|
|
$
|
9,334,109
|
|
|
$
|
-
|
|
1-4 family residential
|
|
|
307,109
|
|
|
|
156,742
|
|
|
|
469,481
|
|
|
|
933,332
|
|
|
|
43,137,361
|
|
|
|
44,070,693
|
|
|
|
-
|
|
Nonfarm, nonresidential
|
|
|
370,626
|
|
|
|
-
|
|
|
|
157,905
|
|
|
|
528,531
|
|
|
|
89,694,318
|
|
|
|
90,222,849
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
-
|
|
|
|
-
|
|
|
|
130,880
|
|
|
|
130,880
|
|
|
|
54,166,057
|
|
|
|
54,296,937
|
|
|
|
30,809
|
|
Consumer
|
|
|
143,866
|
|
|
|
33,549
|
|
|
|
-
|
|
|
|
177,415
|
|
|
|
4,229,840
|
|
|
|
4,407,255
|
|
|
|
-
|
|
Other loans
|
|
|
-
|
|
|
|
-
|
|
|
|
5,543
|
|
|
|
5,543
|
|
|
|
9,187,959
|
|
|
|
9,193,502
|
|
|
|
-
|
|
Total
|
|
$
|
821,601
|
|
|
$
|
190,291
|
|
|
$
|
763,809
|
|
|
$
|
1,775,701
|
|
|
$
|
209,749,644
|
|
|
$
|
211,525,345
|
|
|
$
|
30,809
|
|
Percentage of total loans
|
|
|
0.39
|
%
|
|
|
0.09
|
%
|
|
|
0.36
|
%
|
|
|
0.84
|
%
|
|
|
99.16
|
%
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accruals included above
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and development
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
1-4 family residential
|
|
|
-
|
|
|
|
212,908
|
|
|
|
469,481
|
|
|
|
682,389
|
|
|
|
86,941
|
|
|
|
769,330
|
|
|
|
|
|
Nonfarm, nonresidential
|
|
|
367,876
|
|
|
|
-
|
|
|
|
157,905
|
|
|
|
525,781
|
|
|
|
146,261
|
|
|
|
672,042
|
|
|
|
|
|
Commercial and industrial
|
|
|
-
|
|
|
|
-
|
|
|
|
100,071
|
|
|
|
100,071
|
|
|
|
-
|
|
|
|
100,071
|
|
|
|
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Other loans
|
|
|
-
|
|
|
|
-
|
|
|
|
5,543
|
|
|
|
5,543
|
|
|
|
-
|
|
|
|
5,543
|
|
|
|
|
|
|
|
$
|
367,876
|
|
|
$
|
212,908
|
|
|
$
|
733,000
|
|
|
$
|
1,313,784
|
|
|
$
|
233,202
|
|
|
$
|
1,546,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and development
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,669,380
|
|
|
$
|
9,669,380
|
|
|
$
|
-
|
|
1-4 family residential
|
|
|
412,158
|
|
|
|
395,682
|
|
|
|
277,572
|
|
|
|
1,085,412
|
|
|
|
42,745,277
|
|
|
|
43,830,689
|
|
|
|
-
|
|
Nonfarm, nonresidential
|
|
|
487,300
|
|
|
|
120,590
|
|
|
|
320,924
|
|
|
|
928,814
|
|
|
|
81,666,822
|
|
|
|
82,595,636
|
|
|
|
3,502
|
|
Commercial and industrial
|
|
|
72,259
|
|
|
|
748,958
|
|
|
|
193,165
|
|
|
|
1,014,382
|
|
|
|
50,916,488
|
|
|
|
51,930,870
|
|
|
|
7,866
|
|
Consumer
|
|
|
62,137
|
|
|
|
72,140
|
|
|
|
27,242
|
|
|
|
161,519
|
|
|
|
4,370,660
|
|
|
|
4,532,179
|
|
|
|
26,120
|
|
Other loans
|
|
|
-
|
|
|
|
11,085
|
|
|
|
-
|
|
|
|
11,085
|
|
|
|
8,797,544
|
|
|
|
8,808,629
|
|
|
|
-
|
|
Total
|
|
$
|
1,033,854
|
|
|
$
|
1,348,455
|
|
|
$
|
818,903
|
|
|
$
|
3,201,212
|
|
|
$
|
198,166,171
|
|
|
$
|
201,367,383
|
|
|
$
|
37,488
|
|
Percentage of total loans
|
|
|
0.51
|
%
|
|
|
0.67
|
%
|
|
|
0.41
|
%
|
|
|
1.59
|
%
|
|
|
98.41
|
%
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-accruals included above
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and development
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
1-4 family residential
|
|
|
-
|
|
|
|
-
|
|
|
|
277,572
|
|
|
|
277,572
|
|
|
|
248,468
|
|
|
|
526,040
|
|
|
|
|
|
Nonfarm, nonresidential
|
|
|
62,070
|
|
|
|
49,503
|
|
|
|
317,421
|
|
|
|
428,994
|
|
|
|
51,445
|
|
|
|
480,439
|
|
|
|
|
|
Commercial and industrial
|
|
|
-
|
|
|
|
-
|
|
|
|
185,300
|
|
|
|
185,300
|
|
|
|
-
|
|
|
|
185,300
|
|
|
|
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
1,122
|
|
|
|
1,122
|
|
|
|
-
|
|
|
|
1,122
|
|
|
|
|
|
Other loans
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
$
|
62,070
|
|
|
$
|
49,503
|
|
|
$
|
781,415
|
|
|
$
|
892,988
|
|
|
$
|
299,913
|
|
|
$
|
1,192,901
|
|
|
|
|
|
Credit Quality Indicators:
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. Loans classified as substandard or special mention are reviewed quarterly by the Company for further impairment or improvement to determine if appropriately classified. All other loans greater than $500,000, commercial lines greater than $250,000 and personal lines of credit greater than $100,000, and unsecured loans greater than $100,000 are specifically reviewed at least annually to determine the appropriate loan grading. In addition, during the renewal process of any loan, as well as when a loan becomes past due, the Company will evaluate the loan grade.
SURREY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6.
|
ALLOWANCE FOR LOAN LOSSES, CONTINUED
|
Loans excluded from the scope of the annual review process above are generally classified as pass credits until: (a) they become past due; (b) management becomes aware of deterioration in the credit worthiness of the borrower; or (c) the customer contacts the Company for a modification. In these circumstances, the loan is specifically evaluated for potential classification as to special mention, substandard or even charged off. The Company uses the following definitions for risk ratings:
Special Mention
. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.
Substandard
. Loans classified as substandard are inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Loans so classified 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.
Doubtful
. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with 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 improbable.
Loans by credit quality indicator are provided in the following table.
|
|
Total
|
|
|
Pass Credits
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and development
|
|
$
|
9,334,109
|
|
|
$
|
9,334,109
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
1-4 family residential
|
|
|
44,070,693
|
|
|
|
43,077,665
|
|
|
|
777,446
|
|
|
|
215,582
|
|
|
|
-
|
|
Nonfarm, nonresidential
|
|
|
90,222,849
|
|
|
|
88,711,073
|
|
|
|
1,143,900
|
|
|
|
367,876
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
54,296,937
|
|
|
|
52,229,418
|
|
|
|
2,064,823
|
|
|
|
2,696
|
|
|
|
-
|
|
Consumer
|
|
|
4,407,255
|
|
|
|
4,397,435
|
|
|
|
9,820
|
|
|
|
-
|
|
|
|
-
|
|
Other loans
|
|
|
9,193,502
|
|
|
|
9,187,959
|
|
|
|
-
|
|
|
|
5,543
|
|
|
|
-
|
|
|
|
$
|
211,525,345
|
|
|
$
|
206,937,659
|
|
|
$
|
3,995,989
|
|
|
$
|
591,697
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total loans
|
|
|
100.0
|
%
|
|
|
97.8
|
%
|
|
|
1.9
|
%
|
|
|
0.3
|
%
|
|
|
-
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed portion of loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and development
|
|
$
|
86,922
|
|
|
$
|
86,922
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
1-4 family residential
|
|
|
546,125
|
|
|
|
378,604
|
|
|
|
-
|
|
|
|
167,521
|
|
|
|
-
|
|
Nonfarm, nonresidential
|
|
|
36,449,869
|
|
|
|
36,342,990
|
|
|
|
106,879
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
11,311,543
|
|
|
|
10,773,095
|
|
|
|
537,100
|
|
|
|
1,348
|
|
|
|
-
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other loans
|
|
|
698,732
|
|
|
|
695,961
|
|
|
|
-
|
|
|
|
2,771
|
|
|
|
-
|
|
|
|
$
|
49,093,191
|
|
|
$
|
48,277,572
|
|
|
$
|
643,979
|
|
|
$
|
171,640
|
|
|
$
|
-
|
|
|
|
Total
|
|
|
Pass Credits
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and development
|
|
$
|
9,669,380
|
|
|
$
|
9,669,380
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
1-4 family residential
|
|
|
43,830,689
|
|
|
|
43,240,136
|
|
|
|
590,553
|
|
|
|
-
|
|
|
|
-
|
|
Nonfarm, nonresidential
|
|
|
82,595,636
|
|
|
|
81,511,272
|
|
|
|
1,084,364
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
51,930,870
|
|
|
|
50,362,579
|
|
|
|
1,568,291
|
|
|
|
-
|
|
|
|
-
|
|
Consumer
|
|
|
4,532,179
|
|
|
|
4,525,777
|
|
|
|
6,402
|
|
|
|
-
|
|
|
|
-
|
|
Other loans
|
|
|
8,808,629
|
|
|
|
8,797,544
|
|
|
|
11,085
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
201,367,383
|
|
|
$
|
198,106,688
|
|
|
$
|
3,260,695
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
98.4
|
%
|
|
|
1.6
|
%
|
|
|
-
|
%
|
|
|
-
|
%
|
SURREY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6.
|
ALLOWANCE FOR LOAN LOSSES, CONTINUED
|
|
|
Total
|
|
|
Pass Credits
|
|
|
Special
Mention
|
|
|
Substandard
|
|
|
Doubtful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guaranteed portion of loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and development
|
|
$
|
88,754
|
|
|
$
|
88,754
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
1-4 family residential
|
|
|
642,150
|
|
|
|
433,306
|
|
|
|
208,844
|
|
|
|
-
|
|
|
|
-
|
|
Nonfarm, nonresidential
|
|
|
36,610,890
|
|
|
|
36,250,939
|
|
|
|
359,951
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
11,674,243
|
|
|
|
11,555,133
|
|
|
|
119,110
|
|
|
|
-
|
|
|
|
-
|
|
Consumer
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other loans
|
|
|
713,210
|
|
|
|
707,667
|
|
|
|
5,543
|
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
49,729,247
|
|
|
$
|
49,035,799
|
|
|
$
|
693,448
|
|
|
$
|
-
|
|
|
$
|
-
|
|
NOTE 7.
|
TROUBLED DEBT RESTRUCTURINGS
|
For the three and six months ended June 30, 2016, the following table presents loans modified during the period that were considered to be troubled debt restructurings. For the three and six months ended June 30, 2015, no loans were modified that were considered to be troubled debt restructurings.
|
|
For the three months ended
June 30, 2016
|
|
|
For the six months ended
June 30, 2016
|
|
|
|
Number
of
Contracts
|
|
|
Pre-
Modification
Outstanding
Recorded
Investment
|
|
|
Post-
Modification
Outstanding
Recorded
Investment
|
|
|
Number
of
Contracts
|
|
|
Pre-
Modification
Outstanding
Recorded
Investment
|
|
|
Post-
Modification
Outstanding
Recorded
Investment
|
|
Troubled Debt Restructurin
gs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction and development
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
1-4 Family residential
|
|
|
1
|
|
|
|
137,472
|
|
|
|
137,472
|
|
|
|
1
|
|
|
|
137,472
|
|
|
|
137,472
|
|
Nonfarm, nonresidential
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Commercial and industrial
|
|
|
2
|
|
|
|
41,435
|
|
|
|
41,435
|
|
|
|
2
|
|
|
|
41,435
|
|
|
|
41,435
|
|
During the three months ended June 30, 2016 and 2015, no loans that had previously been restructured were in default.
During the three months ended June 30, 2016, the Bank modified three loans that were considered to be troubled debt restructurings. The terms for these loans were extended. One loan was renewed while interest was not paid current
In the determination of the allowance for loan losses, management considers troubled debt restructurings and subsequent defaults in these restructurings by adjusting the loan grades of such loans, which figure into the environmental factors associated with the allowance. Defaults resulting in charge-offs affect the historical loss experience ratios which are a component of the allowance calculation. Additionally, specific reserves may be established on restructured loans evaluated individually.
SURREY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available for sale, trading securities and derivatives, if present, are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.
Fair Value Hierarchy
Under the Fair Value Measurements and Disclosures Topic of the FASB ASC, the Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
|
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 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 use of option pricing models, discounted cash flow models and similar techniques.
|
Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.
Investment Securities Available for Sale
Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if 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. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.
Loans
The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with the Receivables Topic of the FASB ASC. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At June 30, 2016, substantially all of the total impaired loans were evaluated based on the fair value of the collateral and discounted cash flows. In accordance with the Fair Value and Measurement Topic of the FASB ASC, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8.
|
FAIR VALUE, CONTINUED
|
Servicing Assets
A valuation of loan servicing rights is performed on an individual basis due to the small number of loans serviced. Loans are evaluated on a discounted earnings basis to determine the present value of future earnings. The present value of the future earnings is the estimated market value for the loan, calculated using consensus assumptions that a first party purchaser would utilize in evaluating a potential acquisition of the servicing. As such, the Company classifies loan servicing rights as Level 3.
Foreclosed Assets
Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis.
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Government-sponsored enterprises
|
|
$
|
4,003
|
|
|
$
|
-
|
|
|
$
|
4,003
|
|
|
$
|
-
|
|
Mortgage-backed securities
|
|
|
17
|
|
|
|
-
|
|
|
|
17
|
|
|
|
-
|
|
Corporate bonds
|
|
|
300
|
|
|
|
-
|
|
|
|
-
|
|
|
|
300
|
|
Total assets at fair value
|
|
$
|
4,320
|
|
|
$
|
-
|
|
|
$
|
4,020
|
|
|
$
|
300
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Government-sponsored enterprises
|
|
$
|
4,491
|
|
|
$
|
-
|
|
|
$
|
4,491
|
|
|
$
|
-
|
|
Mortgage-backed securities
|
|
|
21
|
|
|
|
-
|
|
|
|
21
|
|
|
|
-
|
|
Corporate bonds
|
|
|
300
|
|
|
|
-
|
|
|
|
-
|
|
|
|
300
|
|
Equities and mutual funds
|
|
|
529
|
|
|
|
529
|
|
|
|
-
|
|
|
|
-
|
|
Total assets at fair value
|
|
$
|
5,341
|
|
|
$
|
529
|
|
|
$
|
4,512
|
|
|
$
|
300
|
|
For the six months ended June 30, 2016 and 2015, the changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows:
|
|
Level 3
|
|
|
|
2016
|
|
|
2015
|
|
(in thousands)
|
|
Fair Value
|
|
|
Fair Value
|
|
Corporate Bonds – Available for Sale
|
|
|
|
|
|
|
Balance, January 1
|
|
$
|
300
|
|
|
$
|
255
|
|
Total unrealized gain (loss) included in income
|
|
|
-
|
|
|
|
-
|
|
Total unrealized gain (loss) included in other comprehensive income
|
|
|
-
|
|
|
|
30
|
|
Bonds called
|
|
|
-
|
|
|
|
-
|
|
Balance, June 30
|
|
$
|
300
|
|
|
$
|
285
|
|
SURREY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8.
|
FAIR VALUE, CONTINUED
|
There was no change in the fair value for the six months period ended June 30, 2016. The change in the fair value of corporate bond assets for the six month period ended June 30, 2015 was $30,000.
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis
The Company may be required, from time to time, to measure certain assets or liabilities at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets and liabilities 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 and liabilities measured at fair value on a nonrecurring basis are included in the table below.
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed assets
|
|
$
|
203
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
203
|
|
Servicing assets
|
|
|
335
|
|
|
|
-
|
|
|
|
-
|
|
|
|
335
|
|
Total assets at fair value
|
|
$
|
538
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
538
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
|
$
|
548
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
548
|
|
Foreclosed assets
|
|
|
384
|
|
|
|
-
|
|
|
|
-
|
|
|
|
384
|
|
Servicing assets
|
|
|
340
|
|
|
|
-
|
|
|
|
-
|
|
|
|
340
|
|
Total assets at fair value
|
|
$
|
1,272
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,272
|
|
Financial Instruments
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
Cash and due from banks
: The carrying amounts reported in the balance sheet for cash and due from banks approximate their fair values.
Interest-bearing deposits with banks
: Fair values for time deposits are estimated using a discounted cash flow analysis that applies interest rates currently being offered on certificates to a schedule of aggregated contractual maturities on such time deposits.
Federal funds sold
: Due to the short-term nature of these assets, the carrying value approximates fair value.
Securities
: Fair values for securities, excluding restricted equity securities, are based on quoted market prices, where 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.
The carrying values of restricted equity securities approximate fair values.
SURREY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8.
|
FAIR VALUE, CONTINUED
|
Loans receivable
: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics.
The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows.
Bank owned life insurance:
The carrying amount reported in the balance sheet approximates the fair value as it represents the cash surrender value of the life insurance.
Deposit liabilities
: The fair values disclosed for demand and savings deposits are, by definition, equal to the amount payable on demand at the reporting date. The fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated contractual maturities on such time deposits.
Federal funds purchased, securities sold under agreements to repurchase and short-term debt
: The carrying amounts of federal funds purchased, securities sold under agreements to repurchase and short-term debt approximate their fair values.
Long-term debt:
The fair value of long-term debt is estimated using a discounted cash flow calculation that applies interest rates currently available on similar instruments.
Other liabilities
: For fixed-rate loan commitments, fair value considers the difference between current levels of interest rates and the committed rates. The carrying amounts of other liabilities approximate fair value.
The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of June 30, 2016 and December 31, 2015. This table excludes financial instruments for which the carrying amount approximates fair value.
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
(dollars in thousands)
|
|
|
|
|
Fair Value
|
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets or
Liabilities
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Instruments – Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
207,918
|
|
|
$
|
214,128
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
214,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Instruments-Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
216,689
|
|
|
|
209,838
|
|
|
|
-
|
|
|
|
73,022
|
|
|
|
136,816
|
|
Long-Term Debt
|
|
|
1,750
|
|
|
|
1,750
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Instruments – Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
197,905
|
|
|
$
|
203,047
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
203,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Instruments-Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
212,688
|
|
|
|
205,778
|
|
|
|
-
|
|
|
|
74,693
|
|
|
|
131,085
|
|
Long-Term Debt
|
|
|
2,750
|
|
|
|
2,865
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,865
|
|
SURREY BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9.
|
RECLASSIFICATION OF COMMON STOCK
|
On May 27, 2016, the Company held its Annual Meeting of Shareholders. A proposal to approve an amendment to the Company’s Articles of Incorporation was duly approved by the Company’s shareholders. Following shareholder approval, the Company filed Articles of Amendment to (i) create a new class of non-voting common stock, no par value per share, designated “Class A Common Stock”; and (ii) effect the “Reclassification” on May 27, 2016 of each share of Common Stock outstanding immediately prior to the reclassification which was owned by a shareholder of record who owned less than 300 shares of Common Stock, as Class A Common Stock, on the basis of one share of Class A Common Stock for each share of Common Stock so reclassified.
As an alternative to receiving shares of Class A Common Stock, shareholders holding less than 300 shares of Common Stock may elect to receive $12.75 per share for their shares of Common Stock.
Holders of Class A Common Stock will have the right to receive a premium of $0.03 per share with respect to any dividends paid to holders of Common Stock. Except as to voting rights and the dividend preference, shares of Class A Common Stock have the same preferences, limitations and relative rights as, share ratably with, and are identical in all respects to shares of Common Stock as to all matters.
As a consequence of the Reclassification the Company has fewer than 1,200 shareholders of record and intends to terminate the registration of its Common Stock under the Securities and Exchange Act of 1934, as amended, and become a non-reporting company. If that occurs, the Company will no longer file periodic reports with the Securities and Exchange Commission (the “SEC”), including annual reports on Form 10-K and quarterly reports on Form 10-Q, and it will no longer be subject to the SEC’s proxy rules.