ALLOWANCE FOR LOAN LOSSES

3 Months Ended

Mar. 31, 2016

ALLOWANCE FOR LOAN LOSSES [Abstract]

NOTE 6.

ALLOWANCE FOR LOAN LOSSES

The activity of the allowance for loan losses by loan components during the three months ended March 31, 2016 and 2015 was as follows:

	Construction & Development			1-4 Family Residential			Nonfarm, Nonresidential		Industrial			Commercial & Consumer			Other			Total

March 31, 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	)		-		(5,129	)		(15,595	)		(17,317	)		(100,706	)
Recoveries		-			7,025			4,584		181,939			2,423			2,329			198,300

Provision		(200	)		64,940			153,116		(188,624	)		(82,122	)		128,704			75,814
Ending balance	$	150,200		$	799,500		$	1,178,100	$	1,350,000		$	82,600		$	239,916		$	3,800,316

Ending balance: individually evaluated for impairment	$	-		$	-		$	-	$	-		$	-		$	-		$	-
Ending balance: collectively evaluated for impairment	$	150,200		$	799,500		$	1,178,100	$	1,350,000		$	82,600		$	239,916		$	3,800,316

Loans Receivable:
Ending balance	$	9,613,485		$	43,710,878		$	88,623,068	$	55,375,294		$	4,508,500		$	8,843,115		$	210,674,340

Ending balance: individually evaluated for impairment	$	10,380		$	1,016,089		$	2,209,087	$	2,113,933		$	-		$	5,543		$	5,355,032
Ending balance: collectively evaluated for impairment	$	9,603,105		$	42,694,789		$	86,413,981	$	53,261,361		$	4,508,500		$	8,837,572		$	205,319,308

March 31, 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		-			(47,169	)		-		(897	)		(35,562	)		-			(83,628	)
Recoveries		-			889			205		49,023			12,549			-			62,666

Provision		(68,000	)		28,773			35,371		(137,135	)		22,997			4,200			(113,794	)
Ending balance	$	92,100		$	780,692		$	1,102,891	$	1,212,891		$	158,734		$	72,600		$	3,419,908

Ending balance: individually evaluated for impairment	$	-		$	64,992		$	113,491	$	143,291		$	-		$	-		$	321,774
Ending balance: collectively evaluated for impairment	$	92,100		$	715,700		$	989,400	$	1,069,600		$	158,734		$	72,600		$	3,098,134

Loans Receivable:
Ending balance	$	5,788,579		$	42,097,111		$	81,314,177	$	52,969,456		$	4,743,081		$	5,523,054		$	192,435,458

Ending balance: individually evaluated for impairment	$	12,953		$	706,295		$	2,904,189	$	1,052,132		$	-		$	242,361		$	4,917,930
Ending balance: collectively evaluated for impairment	$	5,775,626		$	41,390,816		$	78,409,988	$	51,917,324		$	4,743,081		$	5,280,693		$	187,517,528

The following table presents impaired loans individually evaluated by class of loan as of March 31, 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

March 31, 2016
With no related allowance recorded:
Construction and development	$	10,379	$	10,379	$	-	$	10,789	$	219
1-4 family residential		1,016,090		1,088,244		-		1,071,681		19,750
Nonfarm, nonresidential		2,209,087		2,209,087		-		2,237,236		28,131
Commercial and industrial		2,113,933		2,116,629		-		2,117,249		34,606
Consumer		-		-		-		-		-
Other loans		5,543		11,086		-		10,964		-
		5,355,032		5,435,425		-		5,447,919		82,706

With an allowance recorded:
Construction and development		-		-		-		-		-
1-4 family residential		-		-		-		-		-
Nonfarm, nonresidential		-		-		-		-		-
Commercial and industrial		-		-		-		-		-
Consumer		-		-		-		-		-
Other loans		-		-		-		-		-
		-		-		-		-		-

Combined:
Construction and development		10,379		10,379		-		10,789		219
1-4 family residential		1,016,090		1,088,244		-		1,071,681		19,750
Nonfarm, nonresidential		2,209,087		2,209,087		-		2,237,236		28,131
Commercial and industrial		2,113,933		2,116,629		-		2,117,249		34,606
Consumer		-		-		-		-		-
Other loans		5,543		11,086		-		10,964		-
	$	5,355,032	$	5,435,425	$	-	$	5,447,919	$	82,706

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

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
March 31, 2016

Construction and development	$	-		$	-		$	-		$	-		$	9,613,485		$	9,613,485		$	-
1-4 family residential		292,683			17,975			319,279			629,937			43,080,941			43,710,878			9,470
Nonfarm, nonresidential		646,577			46,848			157,905			851,330			87,771,738			88,623,068			-
Commercial and industrial		697,381			125,861			9,496			832,738			54,542,556			55,375,294			-
Consumer		130,913			29,943			17,638			178,494			4,330,006			4,508,500			16,516
Other loans		-			-			5,543			5,543			8,837,572			8,843,115			-
Total	$	1,767,554		$	220,627		$	509,861		$	2,498,042		$	208,176,298		$	210,674,340		$	25,986
Percentage of total loans		0.84	%		0.10	%		0.24	%		1.19	%		98.81	%		100.00	%

Non-accruals included above
Construction and development	$	-		$	-		$	-		$	-		$	-		$	-
1-4 family residential		-			-			309,808			309,808			460,471			770,279
Nonfarm, nonresidential		-			-			157,905			157,905			153,456			311,361
Commercial and industrial		-			-			9,496			9,496			-			9,496
Consumer		-			-			1,122			1,122			-			1,122
Other loans		-			-			5,543			5,543			-			5,543
	$	-		$	-		$	483,874		$	483,874		$	613,927		$	1,097,801

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.

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

March 31, 2016

Construction and development	$	9,613,485		$	9,613,485		$	-		$	-		$	-
1-4 family residential		43,710,878			42,820,067			676,885			213,926			-
Nonfarm, nonresidential		88,623,068			87,019,567			1,603,501			-			-
Commercial and industrial		55,375,294			53,364,059			2,008,539			2,696			-
Consumer		4,508,500			4,497,867			10,633			-			-
Other loans		8,843,115			8,837,572			-			5,543			-
	$	210,674,340		$	206,152,617		$	4,299,558		$	222,165		$	-

Percentage of total loans		100.0	%		97.9	%		2.0	%		0.1	%		-	%

Guaranteed portion of loans

Construction and development	$	88,347		$	88,347		$	-		$	-		$	-
1-4 family residential		587,785			418,597			2,909			166,279			-
Nonfarm, nonresidential		35,945,363			35,834,268			111,095			-			-
Commercial and industrial		11,539,637			11,076,885			461,403			1,349			-
Consumer		-			-			-			-			-
Other loans		701,837			699,066			-			2,771			-
	$	48,862,969		$	48,117,163		$	575,407		$	170,399		$	-

	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	%		-	%		-	%

	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	$	-	$	-

SURREY BANCORP 10-Q