UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the quarterly period ended ~~September~~March 3031, ~~2015~~2016

☐	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from ____________ to ___________

COMMISSION FILE NO. 000-50313

SURREY BANCORP

(Exact name of registrant as specified in its charter)

North Carolina		59-3772016
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

145 North Renfro Street, Mount Airy, NC 27030

(Address of principal executive offices)

(336) 783-3900

(Registrant's telephone number)

Check whether the registrant: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒ No ☐

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☒

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practical date:

On ~~November~~May 12, ~~2015~~2016 there were 3,549,665 common shares issued and outstanding.

PART I – FINANCIAL INFORMATION

PART I – FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements

	Consolidated Balance Sheets March 31, 2016 (Unaudited) and December 31, 2015	3

	Consolidated Statements of Income, Three Months Ended March 31, 2016 and 2015 (Unaudited)	4

	Consolidated Statements of Comprehensive Income, Three Months Ended March 31, 2016 and 2015 (Unaudited)	5

	Consolidated Statements of Cash Flows, Three Months Ended March 31, 2016 and 2015 (Unaudited)	6

	Consolidated Statements of Changes in Stockholders’ Equity Three Months Ended March 31, 2016 and 2015 (Unaudited)	7

	Notes to Consolidated Financial Statements	8-22

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23-29

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	30

Item 4.	Controls and Procedures	31

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	32

Item 1A.	Risk Factors	32

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32

Item 3.	Defaults Upon Senior Securities	32

Item 4.	Mine Safety Disclosures	32

Item 5.	Other Information	32

Item 6.	Exhibits	32

SIGNATURES		33

CERTIFICATIONS		34-36

Item 1.	Consolidated Financial Statements
	Consolidated Balance Sheets September 30, 2015 (Unaudited) and December 31, 2014	3
	Consolidated Statements of Income, Nine Months Ended September 30, 2015 and 2014 (Unaudited)	4
	Consolidated Statements of Income, Three Months Ended September 30, 2015 and 2014 (Unaudited)	5
	Consolidated Statements of Comprehensive Income, Three and Nine Months Ended September 30, 2015 and 2014 (Unaudited)	6
	Consolidated Statements of Cash Flows, Nine Months Ended September 30, 2015 and 2014 (Unaudited)	7
	Consolidated Statements of Changes in Stockholders’ Equity Nine Months Ended September 30, 2015 and 2014 (Unaudited)	8
	Notes to Consolidated Financial Statements	9-23
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24-31
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	32
Item 4.	Controls and Procedures	32
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults Upon Senior Securities	32
Item 4.	Mine Safety Disclosures	32
Item 5.	Other Information	32
Item 6.	Exhibits	32
SIGNATURES		33
CERTIFICATIONS		34-36

Table of Contents

Consolidated Balance Sheets

~~September~~March 3031, ~~2015~~2016 (Unaudited) and December 31, ~~2014~~2015 (Audited)

	September 2015			December 2014
	March 2016			December 2015
Assets
Cash and due from banks	$	57,~~040~~041,~~193~~151		$	65,~~236~~874,~~749~~561
Interest-bearing deposits with banks		5423,~~449~~462,~~791~~068			3732,~~315~~921,~~779~~125
Federal funds sold		1,~~217~~221,~~554~~172			1,~~212~~217,~~776~~801
Investment securities available for sale		5,~~343~~316,~~021~~724			45,~~363~~340,~~805~~743
Restricted equity securities		~~524~~401,~~939~~699			~~618~~397,~~109~~599
Loans, net of allowance for loan losses of $3,567,517 at September 30, 2015 and $3,554,664 at December 31, 2014		195,175,423			189,549,072
Loans, net of allowance for loan losses of $3,800,316 at March 31, 2016 and $3,626,908 at December 31, 2015		207,097,033			197,904,895
Property and equipment, net		5,~~061~~313,~~728~~551			45,~~368~~333,~~589~~066
Foreclosed assets		~~421~~365,~~491~~609			~~280~~384,~~821~~452
Accrued income		1,~~124~~108,~~759~~545			~~997~~1,~~681~~084,164
Goodwill		120,000			120,000
Bank owned life insurance		56,~~087~~671,~~372~~349			5,~~623~~125,~~087~~339
Other assets		32,~~349~~426,~~697~~128			2,~~514~~072,~~855~~810
Total assets	$	~~276~~260,~~915~~545,~~968~~029		$	~~253~~257,~~201~~776,~~323~~555
Liabilities and Stockholders’ Equity
Liabilities
Deposits:
Noninterest-bearing	$	6059,~~441~~875,~~761~~326		$	5254,~~969~~619,~~691~~375
Interest-bearing		~~169~~156,~~507~~405,~~737~~665			~~153~~158,~~696~~068,~~890~~586
Total deposits		~~229~~216,~~949~~280,~~498~~991			~~206~~212,~~666~~687,~~581~~961
Long-term debt		41,~~250~~750,000			62,~~250~~750,000
Dividends payable		4645,~~233~~227			~~827~~1,~~159~~004,642
Accrued interest payable		~~147~~109,~~932~~026			~~110~~91,~~261~~632
Other liabilities		32,~~641~~930,~~905~~472			2,~~576~~571,~~668~~350
Total liabilities		~~238~~221,~~035~~115,~~568~~716			~~216~~219,~~430~~105,~~669~~585
Commitments and contingencies (Note 4)
Stockholders’ equity
Preferred stock, 1,000,000 shares authorized,
189,356 shares of Series A issued and outstanding with no par value 4.5% convertible non-cumulative, perpetual, with a liquidation value of $14 per share;		2,620,325			2,620,325
181,154 shares of Series D issued and outstanding with no par value 5.0% convertible non-cumulative, perpetual; with a liquidation value of $7.08 per share;		1,248,482			1,248,482
Common stock, 10,000,000 shares authorized at no par value; 3,549,665 shares issued and outstanding		12,101,480			12,101,480
Common stock, 10,000,000 shares authorized at no par value; 3,549,665 shares issued and outstanding at March 31, 2016 and December 31, 2015		12,101,480			12,101,480
Retained earnings		2223,~~938~~459,~~076~~314			2022,~~808~~727,~~309~~587
Accumulated other comprehensive loss		(~~27,963~~288	)		(726,~~942~~904	)
Total stockholders’ equity		3839,~~880~~429,~~400~~313			3638,~~770~~670,~~654~~970
Total liabilities and stockholders’ equity	$	~~276~~260,~~915~~545,~~968~~029		$	~~253~~257,~~201~~776,~~323~~555

See Notes to Consolidated Financial Statements

Table of Contents

Consolidated Statements of Income

~~Nine~~Three months ended ~~September~~March 3031, ~~2015~~2016 and ~~2014~~2015 (Unaudited)

	2015			2014
	2016			2015
Interest income
Loans and fees on loans	$	82,~~096~~873,~~051~~063		$	72,~~908~~679,~~742~~309
Federal funds sold		21,~~046~~266			~~2,036~~691
Investment securities available for sale, taxable		5422,~~184~~782			4516,~~837~~807
Investment securities available for sale, dividends		~~11,782~~649			102,~~656~~234
Deposits with banks		7430,~~108~~856			6920,~~381~~837
Total interest income		82,~~238~~928,~~171~~616			82,~~036~~719,~~652~~878
Interest expense
Deposits		~~702~~212,~~058~~348			~~816~~236,~~409~~397
Fed funds purchased		3			19
Long-term debt		20,867			60,705
Long-term debt		162,591			218,019
Total interest expense		233,215			297,102
Total interest expense		864,652			1,034,447
Net interest income		2,695,401			2,422,776
Net interest income		7,373,519			7,002,205
Provision for (recapture of) loan losses		75,814			(113,794	)
Provision for loan losses		85,717			132,952
Net interest income after provision for (recapture of) loan losses		2,619,587			2,536,570
Net interest income after provision for loan losses		7,287,802			6,869,253
Noninterest income
Service charges on deposit accounts		~~592~~160,~~842~~977			~~598~~191,~~988~~344
Gain on the sale of government guaranteed loans		-			127,362
Fees on loans delivered to correspondents		7,194			5,646
Fees on loans delivered to correspondents		71,583			18,464
Other service charges and fees		180,185			171,193
Other service charges and fees		543,378			499,856
Gain (loss) on the sale of investment securities		(33,127	)		4,376
Gain (loss) on the sale of investment securities		5,244			(1,670	)
Income from bank owned life insurance		46,010			36,824
Income from bank owned life insurance		111,190			119,720
Insurance commissions		100,911			83,777
Insurance commissions		374,972			388,778
Brokerage commissions		14,681			79,041
Brokerage commissions		135,374			139,911
Other operating income		61,726			53,033
Other operating income		83,030			51,176
Total noninterest income		538,557			625,234
Total noninterest income		1,917,613			1,942,585
Noninterest expense
Salaries and employee benefits		21,~~914~~078,~~354~~058			21,~~869~~032,~~549~~331
Occupancy expense		~~338~~129,~~881~~093			~~339~~109,~~324~~348
Equipment expense		~~206~~68,~~926~~451			~~204~~62,~~098~~896
Data processing		~~336~~129,~~903~~576			~~341~~123,~~079~~006
Foreclosed assets, net		~~119~~34,~~015~~031			1238,~~770~~844
Postage, printing and supplies		~~148~~43,~~879~~479			~~143~~41,~~987~~324
Professional fees		~~371~~17,~~484~~703			~~323~~141,~~384~~999
FDIC insurance premiums		8732,~~228~~515			8924,~~503~~458
Other expense		1422,~~146,040~~683			1458,~~094,460~~462
Total noninterest expense		51,~~669~~955,~~710~~589			52,~~418~~032,~~154~~668
Net income before income taxes		31,~~535~~202,~~705~~555			31,~~393~~129,~~684~~136
Income tax expense		1425,~~268,748~~601			1400,~~234,817~~702
Net income		2776,~~266,957~~954			2728,~~158,867~~434
Preferred stock dividends		(~~137~~45,~~190~~227	)		(~~137~~45,~~190~~227	)
Net income available to common stockholders	$	2731,~~129,767~~727		$	2683,~~021,677~~207
Basic earnings per common share	$	0.6021		$	0.5719
Diluted earnings per common share	$	0.5419		$	0.5217
Basic weighted average common shares outstanding		3,549,665			3,~~542~~549,~~984~~665
Diluted weighted average common shares outstanding		4,~~186~~183,~~647~~600			4,~~178~~187,~~933~~410

See Notes to Consolidated Financial Statements

Table of Contents

Consolidated Statements of Comprehensive Income

Three months ended ~~September~~March 3031, ~~2015~~2016 and ~~2014~~2015 (Unaudited)

	2015			2014
	2016			2015
Interest income
Net income	$	776,954		$	728,434
Loans and fees on loans	$	2,739,903		$	2,684,694
Other comprehensive income:
Federal funds sold		683			682
Investment securities available for sale:
Investment securities available for sale, taxable		20,099			13,430
Unrealized holding gains		7,455			12,825
Investment securities available for sale, dividends		5,663			3,525
Tax effect		(2,703	)		(4,801	)
Deposits with banks		26,111			22,137
Reclassification of (gains) losses recognized in net income		33,127			(4,376	)
Total interest income		2,792,459			2,724,468
Tax effect		(11,263	)		1,488
Interest expense
		26,616			5,136
Deposits		234,890			269,901
Comprehensive income	$	803,570		$	733,570
Long-term debt		44,127			73,472
Total interest expense		279,017			343,373
Net interest income		2,513,442			2,381,095
Provision for loan losses		129,213			139,527
Net interest income after provision for loan losses		2,384,229			2,241,568
Noninterest income
Service charges on deposit accounts		193,177			197,443
Fees on loans delivered to correspondents		43,775			12,347
Other service charges and fees		183,890			177,806
Gain on the sale of investment securities		868			873
Income from bank owned life insurance		37,621			40,236
Insurance commissions		159,657			134,552
Brokerage commissions		32,914			50,260
Other operating income		15,462			15,254
Total noninterest income		667,364			628,771
Noninterest expense
Salaries and employee benefits		922,424			920,537
Occupancy expense		110,303			115,069
Equipment expense		79,670			70,981
Data processing		105,695			130,002
Foreclosed assets, net		33,404			5,466
Postage, printing and supplies		42,238			47,039
Professional fees		123,479			115,523
FDIC insurance premiums		30,689			30,320
Other expense		351,758			318,085
Total noninterest expense		1,799,660			1,753,022
Net income before income taxes		1,251,933			1,117,317
Income tax expense		453,346			402,629
Net income		798,587			714,688
Preferred stock dividends		(46,233	)		(46,233	)
Net income available to common stockholders	$	752,354		$	668,455
Basic earnings per common share	$	0.21		$	0.19
Diluted earnings per common share	$	0.19		$	0.17
Basic weighted average common shares outstanding		3,549,665			3,542,984
Diluted weighted average common shares outstanding		4,185,109			4,180,983

See Notes to Consolidated Financial Statements

Table of Contents

Consolidated Statements of ~~Comprehensive~~Cash ~~Income~~Flows

Three ~~and Nine~~ months ended ~~September~~March 3031, ~~2015~~2016 and ~~2014~~2015 (Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015
	2015			2014			2015			2014
Cash flows from operating activities
Net income	$	~~798~~776,~~587~~954		$	~~714~~728,~~688~~434		$	~~2,266,957~~		$	~~2,158,867~~
Other comprehensive income (loss):
Adjustments to reconcile net income to net cash provided by operations:
Investment securities available for sale:
Depreciation and amortization		73,755			67,627
Unrealized holding gains (losses)		(32,904	)		(4,561	)		(22,693	)		65,750
Gain on sale of property and equipment		(10	)		(50	)
Tax effect		10,597			1,492			6,133			(24,030	)
(Gain) loss on the sale of securities		33,127			(4,376	)
Reclassification of (gains) losses recognized in net income		(868	)		(873	)		(5,244	)		1,670
Loss on the sale of foreclosed assets		-			8,507
Tax effect		295			296			1,783			(568	)
Write down of foreclosed assets		25,048			-
		(22,880	)		(3,646	)		(20,021	)		42,822
Provision (recapture) of loan losses		75,814			(113,794	)
Comprehensive income	$	775,707		$	711,042		$	2,246,936		$	2,201,689
Deferred income tax benefit		(7,199	)		(2,071	)
Accretion of discount on securities, net of amortization of premiums		(211	)		(103	)
Increase in cash surrender value of life insurance		(46,010	)		(36,824	)
Life insurance proceeds		-			1,001,320
Changes in assets and liabilities:
Accrued income		(24,381	)		(3,487	)
Other assets		(360,085	)		91,210
Accrued interest payable		17,394			22,809
Other liabilities		359,122			(60,807	)
Net cash provided by operating activities		923,318			1,698,395
Cash flows from investing activities
Net (increase) decrease in interest-bearing deposits with banks		9,459,057			(5,309,402	)
Net increase in federal funds sold		(3,371	)		(2,231	)
Purchases of investment securities		(1,500,516	)		(1,009,610	)
Maturities of investment securities		1,001,483			1,001,578
Purchase of restricted equity securities		(4,100	)		(11,100	)
Net (increase) decrease in loans		(9,289,032	)		481,474
Proceeds from the sale of investment securities		530,718			11,135
Proceeds from the sale of foreclosed assets		14,875			136,924
Purchases of property and equipment		(54,240	)		(244,800	)
Purchase of bank owned life insurance		(1,500,000	)		-
Proceeds from the sale of property and equipment		10			50
Net cash used in investing activities		(1,345,116	)		(4,945,982	)
Cash flows from financing activities
Net increase in deposits		3,593,030			3,239,968
Maturity of long-term debt		(1,000,000	)		-
Dividends paid		(1,004,642	)		(827,159	)
Net cash provided by financing activities		1,588,388			2,412,809
Net increase (decrease) in cash and cash equivalents		1,166,590			(834,778	)
Cash and due from banks, beginning		5,874,561			6,236,749
Cash and due from banks, ending	$	7,041,151		$	5,401,971
Supplemental disclosures of cash flow information
Interest paid	$	215,821		$	274,293
Taxes paid	$	-		$	-
Supplemental disclosures of non-cash transactions
Loans transferred to foreclosed properties	$	21,080		$	40,136
Cash dividends declared but not paid	$	45,227		$	45,227

See Notes to Consolidated Financial Statements

Table of Contents

Consolidated Statements of ~~Cash~~Changes ~~Flows~~in Stockholders’ Equity

~~Nine~~Three months ended ~~September~~March 3031, ~~2015~~2016 and ~~2014~~2015 (Unaudited)

	2015			2014
	Preferred Stock			Common Stock					Retained Earnings			Accumulated Other Comprehensive
Cash flows from operating activities
	Amount			Shares			Amount					Income (Loss)			Total
Net income	$	2,266,957		$	2,158,867
Balance, January 1, 2015	$	3,868,807			3,549,665		$	12,101,480	$	20,808,309		$	(7,942	)	$	36,770,654
Adjustments to reconcile net income to net cash provided by operations:
Net income		-			-			-		728,434			-			728,434
Depreciation and amortization		202,084			203,536
Other comprehensive income		-			-			-		-			5,136			5,136
Gain on sale of property and equipment		(50	)		(3,406	)
Dividends declared and accrued on convertible Series A preferred stock ($.16 per share)		-			-			-		(29,415	)		-			(29,415	)
Gain on the sale of government guaranteed loans		-			(127,362	)
Dividends declared and accrued on convertible Series D preferred stock ($.09 per share)		-			-			-		(15,812	)		-			(15,812	)
(Gain) loss on the sale of securities		(5,244	)		1,670
Balance, March 31, 2015	$	3,868,807			3,549,665		$	12,101,480	$	21,491,516		$	(2,806	)	$	37,458,997
(Gain) loss on the sale of foreclosed assets		21,248			(3,466	)
Balance, January 1, 2016	$	3,868,807			3,549,665		$	12,101,480	$	22,727,587		$	(26,904	)	$	38,670,970
Provision for of loan losses		85,717			132,952
Net income		-			-			-		776,954			-			776,954
Deferred income taxes		1,868			(3,828	)
Other comprehensive income		-			-			-		-			26,616			26,616
(Accretion) of discount on securities, net of amortization of premiums		(505	)		21
Dividends declared and accrued on convertible Series A preferred stock ($.16 per share)		-			-			-		(29,415	)		-			(29,415	)
Increase in cash surrender value of life insurance		(111,190	)		(119,719	)
Dividends declared and accrued on convertible Series D preferred stock ($.09 per share)		-			-			-		(15,812	)		-			(15,812	)
Life insurance proceeds		1,001,320			-
Balance, March 31, 2016	$	3,868,807			3,549,665		$	12,101,480	$	23,459,314		$	(288	)	$	39,429,313
Changes in assets and liabilities:
Accrued income		(127,078	)		(79,743	)
Other assets		(1,247,944	)		(1,595,392	)
Accrued interest payable		37,671			76,734
Other liabilities		1,129,972			1,418,609
Net cash provided by operating activities		3,254,826			2,059,473
Cash flows from investing activities
Net increase in interest-bearing deposits with banks		(17,134,012	)		(2,234,562	)
Net (increase) decrease in federal funds sold		(4,778	)		99,166
Purchases of investment securities		(3,024,364	)		(1,137,854	)
Maturities of investment securities		2,004,016			1,255,282
Redemption of restricted equity securities		104,400			59,000
Purchase of restricted equity securities		(11,230	)		(170	)
Net increase in loans		(6,185,511	)		(9,088,199	)
Proceeds from the sale of investment securities		18,944			131,403
Proceeds from the sale of foreclosed assets		311,525			39,591
Purchases of property and equipment		(895,223	)		(192,537	)
Proceeds from the sale of property and equipment		50			5,575
Net cash used in investing activities		(24,816,183	)		(11,063,305	)
Cash flows from financing activities
Net increase in deposits		23,282,917			8,919,589
Maturities of long-term debt		(2,000,000	)		-
Dividends paid		(918,116	)		(881,216	)
Net cash provided by financing activities		20,364,801			8,038,373
Net decrease in cash and cash equivalents		(1,196,556	)		(965,459	)
Cash and due from banks, beginning		6,236,749			7,424,593
Cash and due from banks, ending	$	5,040,193		$	6,459,134
Supplemental disclosures of cash flow information
Interest paid	$	826,981		$	957,713
Taxes paid	$	1,292,479		$	1,486,722
Supplemental disclosures of non-cash transactions
Loans transferred to foreclosed properties	$	473,443		$	177,461
Cash dividends declared but not paid	$	46,233		$	46,233

See Notes to Consolidated Financial Statements

Table of Contents

Consolidated Statements of Changes in Stockholders’ Equity

Nine months ended September 30, 2015 and 2014 (Unaudited)

	Preferred Stock		Common Stock				Retained			Accumulated Other Comprehensive
	Amount		Shares		Amount		Earnings			Income (Loss)			Total
Balance, January 1, 2014	$	3,868,807		3,542,984	$	12,061,153	$	18,329,089		$	(41,423	)	$	34,217,626
Net income		-		-		-		2,158,867			-			2,158,867
Other comprehensive income		-		-		-		-			42,822			42,822
Dividends declared and accrued on convertible Series A preferred stock ($.47 per share)		-		-		-		(89,225	)		-			(89,225	)
Dividends declared and accrued on convertible Series D preferred stock ($.26 per share)		-		-		-		(47,965	)		-			(47,965	)
Balance, September 30, 2014	$	3,868,807		3,542,984	$	12,061,153	$	20,350,766		$	1,399		$	36,282,125
Balance, January 1, 2015	$	3,868,807		3,549,665	$	12,101,480	$	20,808,309		$	(7,942	)	$	36,770,654
Net income		-		-		-		2,266,957			-			2,266,957
Other comprehensive income		-		-		-		-			(20,021	)		(20,021	)
Dividends declared and accrued on convertible Series A preferred stock ($.47 per share)		-		-		-		(89,225	)		-			(89,225	)
Dividends declared and accrued on convertible Series D preferred stock ($.26 per share)		-		-		-		(47,965	)		-			(47,965	)
Balance, September 30, 2015	$	3,868,807		3,549,665	$	12,101,480	$	22,938,076		$	(27,963	)	$	38,880,400

See Notes to Consolidated Financial Statements

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SURREY BANCORP

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 ~~September~~March 3031, ~~2015~~2016, the results of its operations and comprehensive income for the ~~nine and~~ three months ended ~~September~~March 3031, ~~2015~~2016 and ~~2014~~2015, and its changes in stockholders’ equity and cash flows for the ~~nine~~three months ended ~~September~~March 3031, ~~2015~~2016 and ~~2014~~2015. These adjustments are of a normal and recurring nature. The results of operations for the ~~nine~~three months ended ~~September~~March 3031, ~~2015~~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, ~~2014~~2015, included in the Company’s Form 10-K. The balance sheet at December 31, ~~2014~~2015, has been taken from the audited financial statements at that date.

Organization

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, ~~2014~~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.

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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 ~~September~~March 3031, ~~2015~~2016 and December 31, ~~2014~~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 ~~September~~March 3031, ~~2015~~2016 and December 31, ~~2014~~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.

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SURREY BANCORP

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 ~~2014~~2016, the FASB amended ~~Receivables~~the Financial Instruments topic of the Accounting Standards Codification. ~~The amendments are intended~~ to ~~resolve~~address ~~diversity~~certain inaspects ~~practice~~of ~~with~~recognition, ~~respect~~measurement, topresentation, ~~when~~and adisclosure ~~creditor~~of ~~should~~financial ~~reclassify a collateralized consumer mortgage loan to other real estate owned (OREO)~~instruments. InThe ~~addition, the~~ amendments ~~require~~will abe ~~creditor~~effective ~~reclassify~~for afiscal ~~collateralized~~years ~~consumer~~beginning ~~mortgage~~after ~~loan~~December to15, ~~OREO upon obtaining legal title to the real estate collateral~~2017, orincluding ~~the~~interim ~~borrower~~periods ~~voluntarily~~within ~~conveying~~those ~~all~~fiscal ~~interest in the real estate property to the lender to satisfy the loan through a deed in lieu of foreclosure or similar legal agreement~~years. The ~~amendments~~Company ~~became~~will ~~effective~~apply ~~for~~ the ~~Company on January 1, 2015. In implementing this~~ guidance, ~~assets~~by ~~that~~means ~~are~~of ~~reclassified~~a ~~from~~cumulative-effect ~~real~~adjustment ~~estate~~ to ~~loans are measured at~~ the ~~carrying~~balance ~~value~~sheet as of the ~~real~~beginning ~~estate~~of at the ~~date~~fiscal year of adoption. ~~Assets~~The ~~reclassified~~amendments ~~from~~related ~~loans~~ to ~~real~~equity ~~estate~~securities ~~are~~without ~~measured~~readily atdeterminable ~~the~~fair ~~lower~~values ofwill ~~the~~be ~~net~~applied ~~amount~~prospectively ofto ~~the~~equity ~~loan~~investments ~~receivable~~that orexist ~~the~~as ~~fair value~~ of the ~~real estate less costs to sell at the~~ date of adoption. ~~The~~of ~~Company will apply~~ the amendments ~~prospectively~~. The Company does not expect these amendments to have a material effect on its financial statements.

11In 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.

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SURREY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.

BASIS OF PRESENTATION, CONTINUED

Recent Accounting Pronouncements, continued

In ~~May~~March ~~2014~~2016, the FASB issued guidance to ~~change~~simplify ~~the~~several ~~recognition~~aspects of ~~revenue~~the ~~from~~accounting ~~contracts~~for ~~with~~share-based ~~customers.~~payment ~~The~~award ~~core~~transactions ~~principle~~including of the ~~new~~income ~~guidance~~tax isconsequences, ~~that an entity should recognize revenue to reflect~~ the ~~transfer~~classification of ~~goods~~awards ~~and~~as ~~services~~either toequity ~~customers~~or inliabilities, anand ~~amount~~the ~~equal~~classification toon the ~~consideration~~statement ~~the~~of ~~entity~~cash ~~receives or expects to receive~~flows. Additionally, ~~The~~the guidance ~~will~~simplifies betwo ~~effective~~areas ~~for~~specific ~~the~~to ~~Company~~entities ~~for~~other ~~reporting~~than ~~periods~~public ~~beginning~~business ~~after~~entities ~~December~~allowing ~~15,~~them ~~2017. The Company will~~ apply ~~the guidance using~~ a ~~modified~~practical ~~retrospective~~expedient ~~approach.~~to ~~The~~estimate ~~Company~~the ~~does~~expected ~~not~~term ~~expect~~for ~~these~~all ~~amendments~~awards towith ~~have~~performance aor ~~material~~service ~~effect~~conditions onthat ~~its~~have ~~financial~~certain ~~statements.~~characteristics Inand ~~August~~also ~~2015,~~allowing ~~the~~them ~~FASB~~to ~~deferred~~make ~~the~~a ~~effective~~one-time ~~date~~election ofto ~~ASU~~switch ~~2014-09, Revenue~~ from ~~Contracts~~measuring ~~with~~all ~~Customers.~~liability-classified Asawards aat ~~result~~fair ofvalue ~~the~~to ~~deferral,~~measuring ~~the~~them ~~guidance~~at inintrinsic ~~ASU~~value. ~~2014-09~~The amendments will be effective for the Company for ~~reporting~~annual periods beginning after December 15, ~~2017.~~2016 ~~The~~and ~~Company~~interim ~~will~~periods ~~apply~~within ~~the~~those ~~guidance~~annual ~~using a modified retrospective approach~~periods. The Company does not expect these amendments to have a material effect on its financial statements.

In ~~January~~March ~~2015~~2016, the FASB ~~issued~~amended ~~guidance~~the toRevenue ~~eliminate~~ from ~~U.S.~~Contracts ~~GAAP~~with ~~the~~Customers ~~concept~~topic of anthe ~~extraordinary~~Accounting ~~item,~~Standards ~~which~~Codification isto anclarify ~~event~~the orimplementation ~~transaction~~guidance ~~that~~on isprincipal ~~both~~versus ~~(1)~~agent ~~unusual~~considerations ~~in nature~~ and ~~(2)~~address ~~infrequently~~how ~~occurring. Under the new guidance,~~ an entity ~~will~~should noassess ~~longer~~whether ~~(1)~~it ~~segregate~~is anthe ~~extraordinary~~principal ~~item~~or ~~from~~ the ~~results~~agent ofin ~~ordinary~~contracts ~~operations;~~that ~~(2)~~include ~~separately~~three ~~present an extraordinary item on its income statement, net of tax, after income from continuing operations;~~ or ~~(3)~~more ~~disclose income taxes and earnings-per-share data applicable to an extraordinary item~~parties. The amendments will be effective for ~~fiscal~~the ~~years,~~Company ~~and~~for ~~interim~~reporting periods ~~within those fiscal years,~~ beginning after December 15, ~~2015, with early adoption permitted provided that the guidance is applied from the beginning of the fiscal year of adoption~~2017. The Company ~~will apply the guidance prospectively. The Company~~ does not expect these amendments to have a material effect on its financial statements.

In February 2015, the FASB issued guidance which amends the consolidation requirements and significantly changes the consolidation analysis required under U.S. GAAP. Although the amendments are expected to result in the deconsolidation of many entities, the Company will need to reevaluate all its previous consolidation conclusions. The amendments will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted (including during an interim period), provided that the guidance is applied as of the beginning of the annual period containing the adoption date. The Company does not expect these amendments to have a material effect on its financial statements

In June 2015, the FASB issued amendments to clarify the Accounting Standards Codification (ASC), correct unintended application of guidance, and make minor improvements to the ASC that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The amendments were effective upon issuance (June 12, 2015) for amendments that do not have transition guidance. Amendments that are subject to transition guidance will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. The Company does not expect these amendments to have a material effect on its financial statements.

In August 2015, the FASB issued amendments to the Interest topic of the Accounting Standards Codification to clarify the SEC staff’s position on presenting and measuring debt issuance costs incurred in connection with line-of-credit arrangements. The amendments were effective upon issuance. The Company does not expect these amendments to have a material effect on its financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

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. Management has reviewed events occurring through the date the financial statements were issued and no subsequent events have occurred requiring accrual or disclosure.

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SURREY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 2.

SECURITIES

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 ~~September~~March 3031, ~~2015~~2016 and December 31, ~~2014~~2015 follow:

	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
September 30, 2015
March 31, 2016
Government-sponsored enterprises	$	4,~~498~~998,~~020~~434	$	63,~~335~~175	$	~~720~~3,729	$	4,~~503~~997,~~635~~880
Mortgage-backed securities		2118,~~561~~746		~~601~~398		-		2219,~~162~~144
Corporate bonds		300,000		-		~~6,000~~300		~~294~~299,~~000~~700
Equities and mutual funds		565,799		16,824		59,399		523,224
	$	5,317,180	$	3,573	$	4,029	$	5,316,724
	$	5,385,380	$	23,760	$	66,119	$	5,343,021
December 31, 2015
December 31, 2014
Government-sponsored enterprises	$	4,498,227	$	3,130	$	10,117	$	4,491,240
Government-sponsored enterprises	$	3,500,000	$	1,170	$	4,640	$	3,496,530
Mortgage-backed securities		20,233		446		-		20,679
Mortgage-backed securities		25,592		715		-		26,307
Corporate bonds		300,000		-		300		299,700
Corporate bonds		300,000		-		45,000		255,000
Equities and mutual funds		563,321		14,644		48,841		529,124
Equities and mutual funds		552,635		42,900		9,567		585,968
	$	5,381,781	$	18,220	$	59,258	$	5,340,743
	$	4,378,227	$	44,785	$	59,207	$	4,363,805

At ~~September~~March 3031, ~~2015~~2016 and December 31, ~~2014~~2015, ~~approximately~~substantially ~~$3,931,000~~all ~~of the~~ 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 ~~September~~March 3031, ~~2015~~2016, were as follows:

	Amortized Cost		Fair Value
Due in one year or less	$	~~565~~500,~~799~~000	$	~~523~~499,~~224~~655
Due after one year through five years		4,~~805~~809,~~983~~160		4,~~805~~808,~~782~~828
Due after five years through ten years		~~4,950~~-		~~5,078~~-
Due after ten years		8,~~648~~020		8,~~937~~241
	$	5,~~385~~317,~~380~~180	$	5,~~343~~316,~~021~~724

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 ~~September~~March 3031, ~~2015~~2016 and December 31, ~~2014~~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 at March 31, 2016 and December 31, 2015, and market volatility as it relates to equity and mutual fund investments at ~~September 30, 2015 and~~ December 31, ~~2014~~2015.

	Less Than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
September 30, 2015
March 31, 2016
Government-sponsored enterprises	$	~~999~~1,~~280~~995,050	$	~~720~~3,384	$	-499,655	$	-345	$	~~999~~2,~~280~~494,705	$	~~720~~3,729
Corporate bonds		-		-		~~294~~299,~~000~~700		~~6,000~~300		~~294~~299,~~000~~700		~~6,000~~300
Equities and mutual funds		252,350		48,458		141,657		10,941		394,007		59,399
	$	1,995,050	$	3,384	$	799,355	$	645	$	2,794,405	$	4,029
	$	1,251,630	$	49,178	$	435,657	$	16,941	$	1,687,287	$	66,119
December 31, 2015
December 31, 2014
Government-sponsored enterprises	$	2,488,110	$	10,117	$	-	$	-	$	2,488,110	$	10,117
Government-sponsored enterprises	$	1,995,360	$	4,640	$	-	$	-	$	1,995,360	$	4,640
Corporate bonds		-		-		299,700		300		299,700		300
Corporate bonds		-		-		255,000		45,000		255,000		45,000
Equities and mutual funds		63,865		22,785		41,140		26,056		105,005		48,841
Equities and mutual funds		69,129		5,592		107,999		3,975		177,128		9,567
	$	2,551,975	$	32,902	$	340,840	$	26,356	$	2,892,815	$	59,258
	$	2,064,489	$	10,232	$	362,999	$	48,975	$	2,427,488	$	59,207

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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 ~~seven~~two securities in the portfolio at ~~September~~March 3031, ~~2015~~2016, with unrealized losses for a period greater than 12 months. ~~Two~~One of these securities also had unrealized losses for a period greater than 12 months at December 31, ~~2014~~2015. We have analyzed each individual security for Other Than Temporary Impairment (“OTTI”) purposes by reviewing delinquencies, loan-to-value ratios, and credit quality and concluded that all unrealized losses presented in the tables above are not related to an issuer’s financial condition but are due to changes in the level of interest rates and ~~market~~no ~~fluctuations. No~~ declines are deemed to be other than temporary in nature.

The Company had realized ~~gains~~losses of $533,~~244~~127 from the sales of equity and mutual fund investment securities for the ~~nine~~three month period ended ~~September~~March 3031, ~~2015~~2016, and realized ~~losses~~gains of $14,~~670~~376 from the sales of equity and mutual fund investment securities for the ~~nine~~three month periods ended ~~September~~March 3031, ~~2014~~2015. Total proceeds from the sales amounted to $18530,~~944~~718 and $~~131~~11,~~403~~135 in ~~2015~~2016 and ~~2014~~2015, respectively.

NOTE 3.

EARNINGS PER COMMON SHARE

Basic earnings per common share for the ~~nine and~~ three months ended ~~September~~March 3031, ~~2015~~2016 and ~~2014~~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 ~~September~~March 3031, ~~2015~~2016, the Company had commitments to extend credit, including unused lines of credit of approximately $4943,~~729~~674,000 and letters of credit outstanding of $2,~~370~~801,~~151~~841.

NOTE 5.

LOANS

The major components of loans in the balance sheets at ~~September~~March 3031, ~~2015~~2016 and December 31, ~~2014~~2015 are below.

	2015			2014
	2016			2015
Commercial	$	5255,~~651~~375,~~131~~294		$	5651,~~602~~930,~~425~~870
Real estate:
Construction and land development		69,~~484~~613,~~974~~485			109,~~061~~669,~~249~~380
Residential, 1-4 families		4143,~~938~~710,~~912~~878			4143,~~824~~830,~~806~~689
Residential, 5 or more families		1,~~178~~126,~~251~~153			1,~~109~~155,~~586~~535
Farmland		36,~~360~~243,~~755~~947			36,~~486~~043,~~002~~944
Nonfarm, nonresidential		8388,~~725~~623,~~388~~068			7482,~~275~~595,~~793~~636
Agricultural		41,~~846~~473,~~125~~015			~~675~~1,~~474~~609,150
Consumer, net of discounts of $12,872 in 2015 and $11,950 in 2014		4,373,523			4,997,023
Consumer, net of discounts of $13,915 in 2016 and $11,950 in 2015		4,508,500			4,532,179
		198,559,059			193,032,358
		210,674,340			201,367,383
Deferred loan origination costs, net of (fees)		~~183~~223,~~881~~009			71164,~~378~~420
		198,742,940			193,103,736
		210,897,349			201,531,803
Allowance for loan losses		(3,~~567~~800,~~517~~316	)		(3,~~554~~626,~~664~~908	)
	$	~~195~~207,~~175~~097,~~423~~033		$	~~189~~197,~~549~~904,~~072~~895

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SURREY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5.

LOANS, CONTINUED

Residential, 1-4 family loans pledged as collateral against FHLB advances approximated $12,~~351~~314,000 and $1812,~~124~~691,000 at ~~September~~March 3031, ~~2015~~2016 and December 31, ~~2014~~2015, respectively.

NOTE 6.

ALLOWANCE FOR LOAN LOSSES

The activity of the allowance for loan losses by loan components during the ~~nine~~three months ended ~~September~~March 3031, ~~2015~~2016 and ~~2014~~2015 was as follows:

	Construction & Development			1-4 Family Residential			Nonfarm, Nonresidential			Commercial & Industrial			Consumer			Other			Total
September 30, 2015
March 31, 2016
Allowance for credit losses:
Beginning balance	$	~~160~~150,~~100~~400		$	~~798~~790,~~199~~200		$	1,~~067~~020,~~315~~400		$	1,~~301~~361,~~900~~814		$	~~158~~177,~~750~~894		$	68126,~~400~~200		$	3,~~554~~626,~~664~~908
Charge-offs		-			(~~153~~62,~~023~~665	)		~~(8,481~~-	)		(~~198~~5,~~523~~129	)		(9515,~~503~~595	)		-(17,317	)		(~~455~~100,~~530~~706	)
Recoveries		-			17,~~645~~025			~~761~~4,584			~~351~~181,~~320~~939			282,~~940~~423			-2,329			~~382~~198,~~666~~300
Provision		(~~57,~~200	)		~~119~~64,~~448~~940			~~(65~~153,~~395~~116	)		(50188,~~097~~624	)		75(82,~~161~~122	)		63128,~~800~~704			8575,~~717~~814
Ending balance	$	~~102~~150,~~900~~200		$	~~766~~799,~~269~~500		$	~~994~~1,~~200~~178,100		$	1,~~404~~350,~~600~~000		$	~~167~~82,~~348~~600		$	~~132~~239,~~200~~916		$	3,~~567~~800,~~517~~316
Ending balance: individually evaluated for impairment	$	-		$	~~4,869~~-		$	-		$	-		$	-		$	-		$	~~4,869~~-
Ending balance: collectively evaluated for impairment	$	~~102~~150,~~900~~200		$	~~761~~799,~~400~~500		$	~~994~~1,~~200~~178,100		$	1,~~404~~350,~~600~~000		$	~~167~~82,~~348~~600		$	~~132~~239,~~200~~916		$	3,~~562~~800,~~648~~316
Loans Receivable:
Ending balance	$	69,~~484~~613,~~974~~485		$	4143,~~938~~710,~~912~~878		$	8388,~~725~~623,~~388~~068		$	5255,~~651~~375,~~131~~294		$	4,~~373~~508,~~523~~500		$	98,~~385~~843,~~131~~115		$	~~198~~210,~~559~~674,~~059~~340
Ending balance: individually evaluated for impairment	$	1110,~~729~~380		$	1,~~107~~016,~~891~~089		$	2,~~582~~209,~~894~~087		$	~~644~~2,~~828~~113,933		$	-		$	115,~~585~~543		$	45,~~358~~355,~~927~~032
Ending balance: collectively evaluated for impairment	$	69,~~473~~603,~~245~~105		$	4042,~~831~~694,~~021~~789		$	8186,~~142~~413,~~494~~981		$	5253,~~006~~261,~~303~~361		$	4,~~373~~508,~~523~~500		$	98,~~373~~837,~~546~~572		$	~~194~~205,~~200~~319,~~132~~308
September 30, 2014
March 31, 2015
Allowance for credit losses:
Beginning balance	$	73160,~~000~~100		$	~~617~~798,~~629~~199		$	~~753~~1,~~050~~067,315		$	1,~~708~~301,~~962~~900		$	~~181~~158,~~309~~750		$	4168,400		$	3,~~375~~554,~~350~~664
Charge-offs		-			(7647,~~891~~169	)		~~(1,778~~-	)		(~~3,506~~897	)		(4135,~~118~~562	)		-			(~~123~~83,~~293~~628	)
Recoveries		-			~~1,463~~889			~~80,314~~205			~~153~~49,~~121~~023			3312,~~319~~549			-			~~268~~62,~~217~~666
Provision		79(68,~~100~~000	)		~~157~~28,~~076~~773			~~(10~~35,~~304~~371	)		(81137,~~778~~135	)		(22,~~042~~997	)		104,~~900~~200			~~132~~(113,~~952~~794	)
Ending balance	$	~~152~~92,100		$	~~699~~780,~~277~~692		$	~~821~~1,~~282~~102,891		$	1,~~776~~212,~~799~~891		$	~~151~~158,~~468~~734		$	5272,~~300~~600		$	3,~~653~~419,~~226~~908
Ending balance: individually evaluated for impairment	$	-		$	8664,~~377~~992		$	~~120~~113,~~382~~491		$	~~257~~143,~~699~~291		$	-		$	-		$	~~464~~321,~~458~~774
Ending balance: collectively evaluated for impairment	$	~~152~~92,100		$	~~612~~715,~~900~~700		$	~~700~~989,~~900~~400		$	1,~~519~~069,~~100~~600		$	~~151~~158,~~468~~734		$	5272,~~300~~600		$	3,~~188~~098,~~768~~134
Loans Receivable:
Ending balance	$	105,~~988~~788,~~313~~579		$	4042,~~577~~097,~~088~~111		$	6181,~~894~~314,~~643~~177		$	6952,~~456~~969,~~737~~456		$	54,~~009~~743,~~585~~081		$	45,~~486~~523,~~996~~054		$	192,~~413~~435,~~362~~458
Ending balance: individually evaluated for impairment	$	~~243~~12,~~827~~953		$	~~632~~706,~~885~~295		$	2,~~779~~904,~~367~~189		$	1,~~547~~052,~~309~~132		$	-		$	-242,361		$	54,~~203~~917,~~388~~930
Ending balance: collectively evaluated for impairment	$	105,~~744~~775,~~486~~626		$	3941,~~944~~390,~~203~~816		$	5978,~~115~~409,~~276~~988		$	6751,~~909~~917,~~428~~324		$	54,~~009~~743,~~585~~081		$	45,~~486~~280,~~996~~693		$	187,~~209~~517,~~974~~528

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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 ~~September~~March 3031, ~~2015~~2016 and December 31, ~~2014~~2015 and the recognized interest income per the related period:

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
September 30, 2015
March 31, 2016
With no related allowance recorded:
Construction and development	$	1110,~~729~~379	$	1110,~~729~~379	$	-	$	1210,~~684~~789	$	~~774~~219
1-4 family residential		1,~~088~~016,~~402~~090		1,088,~~402~~244		-		1,~~097~~071,~~425~~681		2919,~~983~~750
Nonfarm, nonresidential		2,~~582~~209,~~894~~087		2,~~582~~209,~~894~~087		-		2,~~739~~237,~~901~~236		8228,~~669~~131
Commercial and industrial		~~644~~2,~~828~~113,933		~~644~~2,~~828~~116,629		-		~~796~~2,~~205~~117,249		834,~~123~~606
Consumer		-		-		-		-		-
Other loans		115,~~585~~543		11,~~585~~086		-		1310,~~546~~964		~~503~~-
		4,339,438		4,339,438		-		4,659,761		122,052
		5,355,032		5,435,425		-		5,447,919		82,706
With an allowance recorded:		-		-		-		-		-
Construction and development		~~19,489~~-		~~19,489~~-		~~4,869~~-		~~20,272~~-		-
1-4 family residential		-		-		-		-		-
Nonfarm, nonresidential		-		-		-		-		-
Commercial and industrial		-		-		-		-		-
Consumer		-		-		-		-		-
Other loans		~~19,489~~-		~~19,489~~-		~~4,869~~-		~~20,272~~-		-
		-		-		-		-		-
Combined:
Construction and development		1110,~~729~~379		1110,~~729~~379		-		1210,~~684~~789		~~774~~219
1-4 family residential		1,~~107~~016,~~891~~090		1,~~107~~088,~~891~~244		~~4,869~~-		1,~~117~~071,~~697~~681		2919,~~983~~750
Nonfarm, nonresidential		2,~~582~~209,~~894~~087		2,~~582~~209,~~894~~087		-		2,~~739~~237,~~901~~236		8228,~~669~~131
Commercial and industrial		~~644~~2,~~828~~113,933		~~644~~2,~~828~~116,629		-		~~796~~2,~~205~~117,249		834,~~123~~606
Consumer		-		-		-		-		-
Other loans		115,~~585~~543		11,~~585~~086		-		1310,~~546~~964		~~503~~-
	$	45,~~358~~355,~~927~~032	$	45,~~358~~435,~~927~~425	$	~~4,869~~-	$	45,~~680~~447,~~033~~919	$	~~122~~82,~~052~~706
December 31, 2014
December 31, 2015
With no related allowance recorded:
Construction and development	$	1311,~~536~~061	$	1311,~~536~~061	$	-	$	1311,~~788~~408	$	21,~~710~~005
1-4 family residential		~~174~~966,~~314~~420		~~174~~975,~~314~~909		-		~~174~~966,~~882~~971		747,~~269~~320
Nonfarm, nonresidential		12,~~806~~640,~~013~~143		12,~~806~~640,~~013~~143		-		12,~~826~~542,~~306~~346		9499,~~953~~820
Commercial and industrial		~~844~~1,~~682~~676,119		~~844~~1,~~682~~676,119		-		~~986~~1,~~462~~647,548		986,~~452~~843
Consumer		-		-		-		-		-
Other loans		~~228~~11,~~111~~085		~~228~~11,~~111~~085		-		~~228~~11,~~884~~085		~~15,244~~591
		3,066,656		3,066,656		-		3,230,322		129,628
		5,304,828		5,314,317		-		5,179,358		235,579
With an allowance recorded:
Construction and development	$	-	$	-	$	-	$	-	$	-
1-4 family residential		~~399,764~~-		~~399,764~~-		~~97,799~~-		~~402,691~~-		~~8,141~~-
Nonfarm, nonresidential		~~852,925~~-		~~852,925~~-		~~117,215~~-		~~852,872~~-		~~358~~-
Commercial and industrial		~~554~~592,~~787~~557		~~554~~592,~~787~~557		~~162~~45,~~900~~014		~~552~~592,~~865~~557		7237,304
Consumer		-		-		-		-		-
Other loans		-		-		-		-		-
		1,807,476		1,807,476		377,914		1,808,428		8,571
		592,557		592,557		45,014		592,557		37,304
Combined:
Construction and development	$	1311,~~536~~061	$	1311,~~536~~061	$	-	$	1311,~~788~~408	$	21,~~710~~005
1-4 family residential		~~574~~966,~~078~~420		~~574~~975,~~078~~909		~~97,799~~-		~~577~~966,~~573~~971		1547,~~410~~320
Nonfarm, nonresidential		2,~~658~~640,~~938~~143		2,~~658~~640,~~938~~143		~~117,215~~-		2,~~679~~542,~~178~~346		9599,~~311~~820
Commercial and industrial		12,~~399~~268,~~469~~676		12,~~399~~268,~~469~~676		~~162~~45,~~900~~014		12,~~539~~240,~~327~~105		9124,~~524~~147
Consumer		-		-		-		-		-
Other loans		~~228~~11,~~111~~085		~~228~~11,~~111~~085		-		~~228~~11,~~884~~085		~~15,244~~591
	$	45,~~874~~897,~~132~~385	$	45,~~874~~906,~~132~~874	$	~~377~~45,~~914~~014	$	5,~~038~~771,~~750~~915	$	~~138~~272,~~199~~883

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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 ~~Loans~~Financing Receivables			Recorded Investment > 90 Days and Accruing
September 30, 2015
March 31, 2016
Construction and development	$	-		$	-		$	-		$	-		$	69,~~484~~613,~~974~~485		$	69,~~484~~613,~~974~~485		$	-
1-4 family residential		~~426~~292,~~321~~683			~~345~~17,~~031~~975			~~413~~319,~~710~~279			1629,~~185,062~~937			4043,~~753~~080,~~850~~941			4143,~~938~~710,~~912~~878			669,~~793~~470
Nonfarm, nonresidential		~~533~~646,~~724~~577			7146,~~648~~848			~~317~~157,~~421~~905			~~922~~851,~~793~~330			8287,~~802~~771,~~595~~738			8388,~~725~~623,~~388~~068			-
Commercial and industrial		90697,~~150~~381			~~680~~125,~~430~~861			~~185~~9,~~300~~496			~~955~~832,~~880~~738			5154,~~695~~542,~~251~~556			5255,~~651~~375,~~131~~294			-
Consumer		~~127~~130,~~833~~913			1729,~~368~~943			4417,~~467~~638			~~189~~178,~~668~~494			4,~~183~~330,~~855~~006			4,~~373~~508,~~523~~500			4316,~~345~~516
Other loans		-			-			-5,543			-5,543			98,~~385~~837,~~131~~572			98,~~385~~843,~~131~~115			-
Total	$	1,~~178~~767,~~028~~554		$	1220,~~114,477~~627		$	~~960~~509,~~898~~861		$	32,~~253~~498,~~403~~042		$	~~195~~208,~~305~~176,~~656~~298		$	~~198~~210,~~559~~674,~~059~~340		$	~~110~~25,~~138~~986
Percentage of total loans		0.5984	%		0.5610	%		0.4824	%		1.6419	%		98.3681	%		100.00	%
Non-accruals included above
Construction and development	$	-		$	-		$	-		$	-		$	-		$	-
1-4 family residential		-			-			~~346~~309,~~917~~808			~~346~~309,~~917~~808			~~252~~460,~~324~~471			~~599~~770,~~241~~279
Nonfarm, nonresidential		~~116,473~~-			-			~~317~~157,~~421~~905			~~433~~157,~~894~~905			94153,~~516~~456			~~528~~311,~~410~~361
Commercial and industrial		-			-			~~185~~9,~~300~~496			~~185~~9,~~300~~496			-			~~185~~9,~~300~~496
Consumer		-			-			1,122			1,122			~~948~~-			21,~~070~~122
Other loans		-			-			-5,543			-5,543			-			-5,543
	$	~~116,473~~-		$	-		$	~~850~~483,~~760~~874		$	~~967~~483,~~233~~874		$	~~347~~613,~~788~~927		$	1,~~315~~097,~~021~~801
December 31, 2014
December 31, 2015
Construction and development	$	~~94,736~~-		$	-		$	-		$	~~94,736~~-		$	9,~~966~~669,~~513~~380		$	109,~~061~~669,~~249~~380		$	-
1-4 family residential		~~362~~412,~~406~~158			~~274~~395,~~595~~682			~~172~~277,~~981~~572			~~809~~1,~~982~~085,412			4142,~~014~~745,~~824~~277			4143,~~824~~830,~~806~~689			-
Nonfarm, nonresidential		~~137~~487,~~733~~300			~~105~~120,~~473~~590			~~663~~320,~~902~~924			~~907~~928,~~108~~814			7381,~~368~~666,~~685~~822			7482,~~275~~595,~~793~~636			-3,502
Commercial and industrial		6372,~~744~~259			20748,~~476~~958			1193,~~271,937~~165			1,~~356~~014,~~157~~382			5550,~~246~~916,~~268~~488			5651,~~602~~930,~~425~~870			-7,866
Consumer		~~169~~62,~~895~~137			4872,~~785~~140			5427,~~306~~242			~~272~~161,~~986~~519			4,~~724~~370,~~037~~660			4,~~997~~532,~~023~~179			5326,~~184~~120
Other loans		-			-11,085			-			-11,085			58,~~271~~797,~~062~~544			58,~~271~~808,~~062~~629			-
Total	$	~~828~~1,~~514~~033,854		$	~~449~~1,~~329~~348,455		$	2818,~~163,126~~903		$	3,~~440~~201,~~969~~212		$	~~189~~198,~~591~~166,~~389~~171		$	~~193~~201,~~032~~367,~~358~~383		$	5337,~~184~~488
Percentage of total loans		0.4351	%		0.2367	%		10.1241	%		1.7859	%		98.2241	%		100.00	%
Non-accruals included above
Construction and development	$	-		$	-		$	-		$	-		$	-		$	-
1-4 family residential		~~162,027~~-			~~56,664~~-			~~172~~277,~~981~~572			~~391~~277,~~672~~572			~~112~~248,~~752~~468			~~504~~526,~~424~~040
Nonfarm, nonresidential		~~133~~62,~~147~~070			-49,503			~~663~~317,~~902~~421			~~797~~428,~~049~~994			~~395~~51,~~558~~445			1480,~~192,607~~439
Commercial and industrial		~~18,859~~-			-			1185,~~271,937~~300			1185,~~290,796~~300			-			1185,~~290,796~~300
Consumer		-			-			1,122			1,122			-			1,122
Other loans		-			-			-			-			-			-
	$	~~314~~62,~~033~~070		$	5649,~~664~~503		$	2781,~~109,942~~415		$	2892,~~480,639~~988		$	~~508~~299,~~310~~913		$	21,~~988~~192,~~949~~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.

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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
September 30, 2015
March 31, 2016
Construction and development	$	69,~~484~~613,~~974~~485		$	69,~~484~~613,~~974~~485		$	-		$	-		$	-
1-4 family residential		4143,~~938~~710,~~912~~878			4142,~~525~~820,~~418~~067			~~413~~676,~~494~~885			-213,926			-
Nonfarm, nonresidential		8388,~~725~~623,~~388~~068			8287,~~729~~019,~~531~~567			~~995~~1,~~857~~603,501			-			-
Commercial and industrial		5255,~~651~~375,~~131~~294			5253,~~090~~364,~~158~~059			~~560~~2,~~973~~008,539			-2,696			-
Consumer		4,~~373~~508,~~523~~500			4,~~367~~497,~~593~~867			410,~~982~~633			~~948~~-			-
Other loans		98,~~385~~843,~~131~~115			98,~~385~~837,~~131~~572			-			-5,543			-
	$	~~198~~210,~~559~~674,~~059~~340		$	~~196~~206,~~582~~152,~~805~~617		$	14,~~975~~299,~~306~~558		$	~~948~~222,165		$	-
Percentage of total loans		100.0	%		9997.09	%		12.0	%		-0.1	%		-	%
Guaranteed portion of loans
Construction and development	$	1488,~~649~~347		$	1488,~~649~~347		$	-		$	-		$	-
1-4 family residential		587,~~856~~785			~~587~~418,~~856~~597			-2,909			-166,279			-
Nonfarm, nonresidential		3635,~~717~~945,~~790~~363			3635,~~164~~834,~~290~~268			~~553~~111,~~500~~095			-			-
Commercial and industrial		11,~~640~~539,~~206~~637			11,~~521~~076,~~859~~885			~~118~~461,~~347~~403			-1,349			-
Consumer		-			-			-			-			-
Other loans		~~752~~701,~~397~~837			~~752~~699,~~397~~066			-			-2,771			-
	$	4948,~~712~~862,~~898~~969		$	4948,~~041~~117,~~051~~163		$	~~671~~575,~~847~~407		$	-170,399		$	-

	Total			Pass Credits			Special Mention			Substandard			Doubtful
December 31, 2014
December 31, 2015
Construction and development	$	109,~~061~~669,~~249~~380		$	109,~~061~~669,~~249~~380		$	-		$	-		$	-
1-4 family residential		4143,~~824~~830,~~806~~689			4143,~~009~~240,~~963~~136			~~641~~590,~~862~~553			~~172,981~~-			-
Nonfarm, nonresidential		7482,~~275~~595,~~793~~636			7281,~~657~~511,~~724~~272			1,~~618~~084,~~069~~364			-			-
Commercial and industrial		5651,~~602~~930,~~425~~870			5550,~~274~~362,~~007~~579			1,~~328~~568,~~418~~291			-			-
Consumer		4,~~997~~532,~~023~~179			4,~~996~~525,~~479~~777			~~544~~6,402			-			-
Other loans		58,~~271~~808,~~062~~629			58,~~254~~797,~~896~~544			1611,~~166~~085			-			-
	$	~~193~~201,~~032~~367,~~358~~383		$	~~189~~198,~~254~~106,~~318~~688		$	3,~~605~~260,~~059~~695		$	~~172,981~~-		$	-
		100.0	%		98.04	%		1.96	%		~~0.1~~-	%		-	%

1817

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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

1588,~~604~~754

1-4 family residential

~~584~~642,~~842~~150

~~306~~433,~~212~~306

~~278~~208,~~630~~844

Nonfarm, nonresidential

2936,~~914~~610,~~244~~890

2936,~~082~~250,~~499~~939

~~831~~359,~~745~~951

Commercial and industrial

1311,~~858~~674,~~258~~243

1211,~~877~~555,~~497~~133

~~980~~119,~~761~~110

Consumer

Other loans

~~768~~713,~~869~~210

~~760~~707,~~786~~667

85,~~083~~543

4549,~~141~~729,~~817~~247

4349,~~042~~035,~~598~~799

2693,~~099,219~~448

NOTE 7.

TROUBLED DEBT RESTRUCTURINGS

For the ~~nine and~~ three months ended ~~September~~March 3031, ~~2015~~2016 and ~~2014~~2015, ~~the~~no ~~following table presents~~ loans ~~modified~~were ~~during the period~~ that were considered to be troubled debt restructurings.

	For the three months ended September 30,						For the nine months ended September 30,
	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
2015
1-4 Family residential		1	$	82,787	$	85,278		1	$	82,787	$	85,278
2014
1-4 Family residential		1		167,797		167,797		4		327,724		327,724

During the three months ended March 31, 2016 and 2015, no loans that had previously been restructured were in default.

During the nine and three months ended September 30, 2015 and 2014, no loans that had previously been restructured were in default.

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.

~~NOTE 8. NORTH CAROLINA TAX RATE CHANGE~~18

On July 23, 2013, North Carolina Governor Pat McCrory signed a major tax reform bill into law that lowered the North Carolina corporate income tax rate among other things. Specifically, the corporate income tax rate was reduced from 6.9% to 6% in 2014 and to 5% in 2015. The rate will be further reduced to 4% during the 2016 tax year and to 3% for post-2016 tax years provided that specified revenue growth targets are reached.

On July 28, 2015, McCrory announced the final revenue figures for the fiscal year ended on June 30, 2015 revealed that North Carolina had a $445 million revenue surplus. Thus, the state met the necessary revenue target for fiscal year 2014-2015 to lower the corporate income tax rate from 5 percent to 4 percent effective for tax years beginning on or after January 1, 2016. As of September 30, the Company estimates the rate reduction trigger will result in a $22,680 reduction in deferred income taxes. The Company has recorded the impact of this legislation as a reduction in deferred income taxes as of September 30, 2015.

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SURREY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 98. FAIR VALUE

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 ~~September~~March 3031, ~~2015~~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.

2019

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SURREY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 98. 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)
September 30, 2015	Total		Level 1		Level 2		Level 3
March 31, 2016	Total		Level 1		Level 2		Level 3
Government-sponsored enterprises	$	4,~~504~~998	$	-	$	4,~~504~~998	$	-
Mortgage-backed securities		2219		-		2219		-
Corporate bonds		~~294~~300		-		-		~~294~~300
Equities and mutual funds		~~523~~-		~~523~~-		-		-
Total assets at fair value	$	5,~~343~~317	$	~~523~~-	$	45,~~526~~017	$	~~294~~300

(in thousands)
December 31, 2014	Total		Level 1		Level 2		Level 3
December 31, 2015	Total		Level 1		Level 2		Level 3
Government-sponsored enterprises	$	34,~~497~~491	$	-	$	34,~~497~~491	$	-
Mortgage-backed securities		2621		-		2621		-
Corporate bonds		~~255~~300		-		-		~~255~~300
Equities and mutual funds		~~586~~529		~~586~~529		-		-
Total assets at fair value	$	45,~~364~~341	$	~~586~~529	$	34,~~523~~512	$	~~255~~300

For the ~~nine~~three months ended ~~September~~March 3031, ~~2015~~2016 and ~~2014~~2015, the changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows:

	Level 3
	2015		2014
	2016		2015
(in thousands)	Fair Value		Fair Value
Corporate Bonds – Available for Sale
Balance, January 1	$	~~255~~300	$	~~451~~255
Total unrealized gain (loss) included in income		-		-
Total unrealized gain (loss) included in other comprehensive income		39-		5115
Bonds called		-		~~(250~~-	)
Balance, September 30	$	294	$	252
Balance, March 31	$	300	$	270

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SURREY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 98. FAIR VALUE, CONTINUED

~~The~~There was no change in the fair value ~~of corporate bond assets~~ for the ~~nine and~~ three ~~month~~months ~~periods~~period ended ~~September~~March 3031, ~~2015 was $39,000 and $9,000, respectively~~2016. The change in the fair value of corporate bond assets for the ~~nine and~~ three month ~~periods~~period ended ~~September~~March 3031, ~~2014~~2015 was $615,000~~, except for the call of a $250,000 corporate bond with a recorded fair valued of $205,000~~.

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)
September 30, 2015	Total		Level 1		Level 2		Level 3
March 31, 2016	Total		Level 1		Level 2		Level 3
Impaired loans:
Foreclosed assets		366		-		-		366
1-4 family residential	$	15	$	-	$	-	$	15
Servicing assets		338		-		-		338
Foreclosed assets		421		-		-		421
Total assets at fair value	$	704	$	-	$	-	$	704
Servicing assets		344		-		-		344
Total assets at fair value	$	780	$	-	$	-	$	780

(in thousands)
December 31, 2014
December 31, 2015	Total		Level 1		Level 2		Level 3
	Total		Level 1		Level 2		Level 3
Impaired loans:
Commercial and industrial	$	~~392~~548	$	-	$	-	$	~~392~~548
Nonfarm, non-residential		736		-		-		736
Foreclosed assets		384		-		-		384
1-4 family residential		302		-		-		302
Servicing assets		340		-		-		340
Foreclosed assets		281		-		-		281
Total assets at fair value	$	1,272	$	-	$	-	$	1,272
Servicing assets		350		-		-		350
Total assets at fair value	$	2,061	$	-	$	-	$	2,061

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.

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SURREY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 98. 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 ~~September~~March 3031, ~~2015~~2016 and December 31, ~~2014~~2015. This table excludes financial instruments for which the carrying amount approximates fair value.

Fair Value Measurements

(dollars in thousands)

Carrying Amount

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)

September 30, 2015

March 31, 2016

Financial Instruments – Assets

Loans, net

~~195~~207,~~175~~097

~~203~~213,~~431~~634

Financial Instruments-Liabilities

Deposits

~~229~~216,~~949~~281

~~222~~206,~~945~~675

8171,~~862~~803

~~141~~134,~~083~~872

Long-Term Debt

41,~~250~~750

41,~~406~~734

December 31, 2014

December 31, 2015

Financial Instruments – Assets

Loans, net

~~189~~197,~~549~~905

~~195~~203,~~254~~047

Financial Instruments-Liabilities

Deposits

~~206~~212,~~667~~688

~~202~~205,~~750~~778

6174,~~925~~693

~~140~~131,~~825~~085

Long-Term Debt

62,~~250~~750

62,~~486~~865

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Table of Contents

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction

This discussion, analysis and related financial information are presented to explain the significant factors which affected Surrey Bancorp's financial condition and results of operations for the three ~~and nine~~ months ended ~~September~~March 3031, ~~2015~~2016 and ~~2014~~2015. This discussion should be read in conjunction with the financial statements and related notes contained within this report.

Surrey Bancorp (“Company”) is a North Carolina corporation, located in Mount Airy, North Carolina. The Company was incorporated on February 6, 2003, and began business on May 1, 2003.

Surrey Bank & Trust ("Bank") is a North Carolina state chartered bank, located in Mount Airy, North Carolina. The Bank was chartered on July 15, 1996, and began operations on July 22, 1996. The Bank has two operating subsidiaries: Surrey Investment Services, Inc. and Freedom Finance, LLC.

Effective March 5, 1998, the Bank became a member of the Federal Home Loan Bank.

Highlights

Certain information contained in this discussion may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are generally identified by phrases such as “the Company expects,” “the Company believes” or words of similar import. Such forward-looking statements involve known and unknown risks including, but not limited to, changes in general economic and business conditions, interest rate fluctuations, competition within and from outside the banking industry, new products and services in the banking industry, risk inherent in making loans such as repayment risks and fluctuating collateral values, problems with technology utilized by the Company, changing trends in customer profiles and changes in laws and regulations applicable to the Company. Although the Company believes that its expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.

Net income available for common stockholders for the three months ended ~~September~~March 3031, ~~2015~~2016, was $~~752~~731,~~354~~727 or $0.19 per diluted share outstanding, compared to a $~~668~~683,~~455~~207 or $0.17 per diluted share outstanding, for the same period in ~~2014~~2015. Earnings for the three months ended ~~September~~March 3031, ~~2015~~2016, are approximately 127.61% higher than for the same period in ~~2014~~2015. The increase in earnings results from an increase in net interest income. Net interest income increased from $2,~~381~~422,~~095~~776 in the ~~third~~first quarter of ~~2014~~2015 to $2,~~513~~695,~~442~~401 in ~~2015~~2016. ~~Most~~This ~~of this~~ increase is due to loan growth. Average loans outstanding increased 37.89% from the ~~third~~first quarter of ~~2014~~2015 to ~~the third quarter of 2015~~2016, or approximately $715,~~125~~037,000. The net interest margin ~~decreased~~increased from 4.1517% to 4.0050% from ~~2014~~2015 to ~~2015~~2016 due to a ~~change~~combination inof ~~the~~higher ~~average~~assets ~~asset~~yields ~~mix~~and lower deposit costs. ~~Higher~~Asset ~~yielding~~yields ~~loans~~increased ~~averaged~~from 804.769% ofin ~~total~~2015 ~~interest~~to ~~earning~~4.90% ~~assets~~in 2016 primarily from a change in ~~the~~asset ~~third~~mix ~~quarter~~and ofa ~~2014~~slight ~~but~~uptick ~~only~~in ~~averaged~~interest 78rates.2% inHigher ~~the~~yielding ~~third~~loans ~~quarter~~made ofup ~~2015~~87.6% Asof aaverage ~~result~~interest ~~overall~~earning ~~asset~~assets ~~yields~~in ~~dropped~~the ~~from~~first ~~4.75%~~quarter inof ~~2014~~2016 as opposed to 481.443% in the first quarter of 2015. The cost of funds decreased from 0.6657% in the ~~third~~first quarter of ~~2014~~2015 to 0.4944% in the ~~third~~first quarter of ~~2015~~2016 ~~but~~as ~~was~~non-interest ~~not~~bearing ~~enough~~deposits tomade ~~offset~~up ~~the~~a ~~reduction~~higher inpercentage ~~asset~~of ~~yields.~~average deposits. The provision for loan ~~loss~~losses ~~reserves~~increased ~~decreased~~ from a recapture of $~~139~~113,~~527~~794 in the ~~third~~first quarter of ~~2014~~2015 to a provision of $~~129~~75,~~213~~814 in ~~2015.~~2016, ~~The~~an ~~decrease~~$189,608 inincrease. ~~the~~The provision increase is ~~partially~~ due to aan ~~decrease~~increase in ~~specific~~gross ~~reserves~~loans onsince ~~impaired~~the ~~loans~~beginning of the year compared to the same period in 2015. ~~Noninterest~~Gross ~~expenses~~loans increased ~~from~~approximately $19,~~753~~307,~~022~~000 infrom December 31, 2015 to March 31, 2016 compared to a reduction of $596,000 during the ~~third~~first quarter of ~~2014~~2015. toThe percentage of loans carrying government guarantees decreased from $149,~~799~~729,~~660~~247, inor 24.7% of gross loans at the end of 2015 to $48,862,969, aor 223.72% ~~increase~~of gross loans at March 31, 2016. The increased credit exposure also contributed to the increased provision for loan losses.

~~Net~~Noninterest income ~~available~~decreased ~~for~~from ~~common~~$625,234 ~~stockholders~~in ~~for~~ the ~~nine~~first ~~months~~quarter ~~ended~~of ~~September 30,~~ 2015, ~~was~~to $2538,~~129,767~~557 orin $02016.54 ~~per~~The ~~diluted~~decrease ~~share~~primarily ~~outstanding,~~results ~~compared~~from to a ~~$2,021,677~~decrease orin ~~$0.52~~brokerage ~~per~~commissions ~~diluted~~from ~~share~~the ~~outstanding,~~Bank’s ~~for~~brokerage ~~the~~and ~~same~~investment ~~period~~subsidiary, inSurrey ~~2014~~Investment Services, Inc., ~~Earnings~~decreased ~~for~~service ~~the~~charges ~~nine~~on ~~months~~deposit ~~ended~~accounts ~~September~~and ~~30,~~a ~~2015,~~loss ~~are~~on ~~approximately~~the 5sale of investment securities.4% ~~higher~~Brokerage ~~than~~commissions ~~for~~decreased from $79,041 in the ~~same~~first ~~period~~quarter of 2015 to $14,681 in ~~2014~~2016. ~~The~~Service ~~increase~~charges in ~~earnings~~deposit ~~results~~accounts decreased from an$191,344 ~~increase~~ in ~~net~~2015 ~~interest~~to ~~income~~$160,977 ~~and~~due ato ~~decrease~~regulatory inchanges ~~the~~involving ~~provision~~insufficient ~~for~~funds ~~loan loss reserves~~charges. ~~Net~~ ~~interest~~Noninterest ~~income~~expenses ~~increased~~decreased 3.8% from $72,~~002~~032,~~205~~668 in the first ~~nine~~quarter ~~months~~ of ~~2014~~2015, to $71,~~373~~955,~~519~~589 in ~~2015~~2016. ~~Most~~This ofdecrease ~~this~~was ~~increase~~primarily is due to ~~loan~~the ~~growth.~~reimbursement ~~Average~~of ~~loans~~legal ~~outstanding~~expenses ~~increased~~associated ~~4.3%~~with ~~from~~ the ~~first~~collection ~~nine months~~ of ~~2014~~government toguaranteed ~~the~~loans. ~~same~~Professional ~~period~~fees indecreased ~~2015,~~from ~~or approximately~~ $7141,~~850,000.~~999 ~~The~~in ~~net~~the ~~interest~~first ~~margin~~quarter ~~increased~~of ~~from~~2015 ~~4.07%~~ to ~~4.09%~~$17,703 ~~from~~in ~~2014~~2016 ~~to 2015~~ due to ~~lower~~the ~~deposit~~recovery ~~costs.~~of ~~Asset~~these ~~yields~~previously ~~dropped~~paid ~~from 4~~fees.~~67% in~~

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Table of Contents

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED

~~2014~~On toMarch ~~4.57%~~31, in2016, ~~2015~~Surrey ~~but~~Bancorp's ~~the~~assets ~~reduction~~totaled ~~was offset by a reduction in the cost of funds. The cost of funds decreased from 0.66% in the first nine months of 2014 to 0.53% in 2015. The provision for loan losses decreased from~~ $~~132~~260,~~952~~545,029 incompared ~~2014~~ to ~~$85,717~~ ~~in 2015. Gross loans increased approximately~~ $5257,~~526~~776,~~000~~555 ~~from~~on December 31, ~~2014 to September 30,~~ 2015. ~~However,~~Net ~~the percentage of~~ loans ~~carrying~~were ~~government guarantees increased from~~ $45207,~~141~~097,~~818,~~033 orcompared ~~23.4% of gross loans at the end of 2014~~ to $49197,~~712~~904,~~898,~~895 oron ~~25.0%~~December ~~of gross loans at September 30~~31, 2015. ~~The~~This ~~decreased~~net ~~credit~~increase ~~exposure~~was ~~resulted~~the inresult ~~lower~~of ~~reserves.~~a ~~Noninterest income decreased from~~ $19,~~942~~306,~~585~~957 increase in ~~the~~loans, ~~first~~a ~~nine months of 2014 to~~ $158,~~917,613~~589 inincrease ~~2015.~~net ~~The~~deferred ~~decrease~~cost ~~primarily~~and ~~results~~ a ~~reduction~~$173,408 innet ~~gains~~increase ~~from~~in the ~~sale~~loan ofloss ~~government guaranteed loans~~reserve. ~~The~~Commercial ~~Company~~and ~~had~~nonfarm nononresidential ~~gains~~loans account for the ~~first nine months of 2015~~increase, ~~down~~with ~~from the $127~~nonfarm,~~362~~ ~~reported~~nonresidential inloans ~~2014.~~representing ~~Noninterest~~most ~~expenses~~of ~~increased~~the 4growth.6% ~~from $5~~Nonfarm,~~418,154~~ innonresidential ~~2014,~~loans toincreased $56,~~669~~027,~~710~~432 inor ~~2015~~7.3% ~~This increase was due increases~~ in ~~salaries~~the ~~and~~first ~~benefits~~quarter ~~and~~of to2016 ~~expenses associated with foreclosed assets. Salaries~~ and ~~benefits~~commercial loans increased ~~1.6% from 2~~$3,~~869~~444,~~549~~424 inor ~~2014 to 2,914,354 in 2015~~6.6%. ~~Increases~~Overall ingross ~~foreclosed~~loans ~~assets~~increased ~~expense, professional fees and other expense all rose as a result of cost required to take possession and dispose of foreclosed properties~~4.6%

OnTotal ~~September~~deposits ~~30, 2015, Surrey Bancorp's assets totaled $276,915,968 compared to $253,201,323~~ on ~~December~~March 31, ~~2014.~~2016, ~~Net loans~~ were $~~195~~216,~~175~~280,~~423~~991 compared to $~~189~~212,~~549~~687,~~072~~961 onat ~~December~~the ~~31,~~end ~~2014~~of 2015. This ~~net~~ increase ~~was~~is ~~the~~attributable ~~result~~to ofan ~~a $5,639,204~~ increase in ~~loans~~noninterest-bearing ~~and~~demand ~~net~~deposits ~~deferred~~accounts, ~~fees~~which ~~and~~increased afrom $1254,~~853~~619,375 ~~net~~at ~~increase~~December ~~in the loan loss reserve. Nonfarm~~31, ~~nonresidential~~2015 ~~loans~~to ~~represent most of the growth in the loan portfolio increasing~~ $959,~~449~~875,~~595~~326 orat ~~12.7%~~March ~~since~~31, ~~the~~2016. ~~end~~Overall, ofnoninterest-bearing ~~2014.~~and ~~There~~interest-bearing ~~was~~demand adeposits 35increased 1.51% ~~decrease~~from in2015 ~~construction~~totals, ~~loans~~ while ~~other~~savings ~~real~~deposits, ~~estate~~including ~~loans~~money ~~collectively~~market ~~grew~~accounts, increased 7.92%. ~~Commercial~~Certificates ~~loans~~of deposit decreased ~~by 7~~1.02%. ~~Overall~~from ~~gross~~December ~~loans~~31, ~~increased~~2015 2totals.9%

~~Total~~Common ~~deposits~~stockholders’ onequity ~~September~~increased ~~30,~~by ~~2015, were~~ $~~229~~758,~~949~~343,~~498~~ ~~compared~~or ~~to $206~~1.96%,~~666,581~~ atduring the ~~end~~three ofmonths ~~2014.~~ended ~~This~~March ~~increase~~31, is2016. ~~attributable~~The ~~to an~~ increase inis ~~demand~~comprised ~~deposit~~of ~~accounts,~~net ~~interest-bearing~~income ~~demand~~of ~~deposits accounts and savings accounts which increased collectively from~~ $~~126~~776,~~665,409~~954 atand ~~December~~adjustments ~~31, 2014~~ to ~~$158,410,691~~other atcomprehensive ~~September~~income ~~30, 2015. Large individual deposits account for much~~ of ~~the increase~~$26,616. ~~These~~Decreases ~~deposits~~included ~~are expected to reduce over~~ the ~~coming~~declaration ~~months. Overall, noninterest-bearing~~ and ~~interest-bearing~~accrual ~~demand~~of ~~deposits~~preferred ~~increased~~dividends 35of $45,227.9% ~~from~~The ~~2014~~net ~~totals,~~increase ~~while~~resulted ~~savings~~in ~~deposits,~~a ~~including~~common ~~money~~stock ~~market~~book ~~accounts,~~value ~~increased~~of 4$10.~~4%.~~02 ~~Certificates~~per ofshare, ~~deposit~~up ~~decreased~~from 10$9.6%80 ~~from~~on December 31, ~~2014 totals, or $8,462,365~~2015.

Common stockholders’ equity increased by $2,109,746, or 6.41%, during the nine months ended September 30, 2015. The net increase is comprised of net income of $2,266,957, a reduction in other comprehensive income of $20,021 and the declaration and accrual of preferred dividends of $137,190. The net increase resulted in a common stock book value of $9.86 per share, up from $9.27 on December 31, 2014.

The book value per common share is calculated by taking total stockholders’ equity, subtracting all preferred equity, and then dividing by the total number of common shares outstanding at the end of the reporting period.

Preferred stockholders’ equity remained the same during the period ended ~~September~~March 3031, ~~2015~~2016.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED

Financial Condition, Liquidity and Capital Resources

Investments

The Bank maintains a portfolio of securities as part of its asset/liability and liquidity management programs which emphasize effective yields and maturities to match its needs. The composition of the investment portfolio is examined periodically and appropriate realignments are initiated to meet liquidity and interest rate sensitivity needs for the Bank. The Company also invests funds in a brokerage account made up of selected equities and mutual funds. The investments were made to increase income in the holding company and improve yields.

Available for sale securities are reported at fair value and consist of bonds, notes, debentures and equity securities and mutual funds not classified as trading securities or as held to maturity securities.

Unrealized holding gains and losses, net of tax, on available for sale securities are reported as a net amount in a separate component of stockholders' equity. Realized gains and losses on the sale of available for sale securities are determined using the specific-identification method. Premiums and discounts are recognized in interest income using the interest method over the period to maturity or to call dates.

Declines in the fair value of individual held to maturity and available for sale securities below cost that are other than temporary are reflected as write-downs of the individual securities to fair value. Related write-downs are included in earnings as realized losses.

Investments in available for sale securities of $5,~~343~~316,~~021~~724 consisted of Government-sponsored enterprise obligations with maturities ranging from 1711 to 3440 months, corporate bonds with maturities of 32.050 years, that reprice quarterly, GNMA adjustable rate mortgage securities, which adjust annually~~, and equity securities and mutual funds~~.

Loans

Net loans outstanding on ~~September~~March 3031, ~~2015~~2016, were $~~195~~207,~~175~~097,~~423~~033 compared to $~~189~~197,~~549~~904,~~072~~895 on December 31, ~~2014~~2015. The Bank maintains a loan portfolio dominated by real estate and commercial loans diversified among various industries. Approximately 6358.49% of the Bank's loans as of ~~September~~March 3031, ~~2015~~2016, are fixed rate loans with 3641.61% floating with the Bank's prime rate or other appropriate internal or external indices.

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED

Deposits

Deposits on ~~September~~March 3031, ~~2015~~2016, were $~~229~~216,~~949~~280,~~498~~991, compared to $~~206~~212,~~666~~687,~~581~~961 on December 31, ~~2014~~2015. The ~~September~~March total consists of a base of approximately 12,~~795~~863 accounts compared to 12,~~690~~768 accounts at December 31, ~~2014~~2015. Interest-bearing accounts represent 7372.73% of ~~September~~March 3031, ~~2015~~2016 period end deposits versus 74.43% at December 31, ~~2014~~2015.

Stockholders' Equity

Surrey Bancorp and Surrey Bank & Trust are subject to various regulatory capital requirements administered by federal banking agencies. The Company and the Bank maintain strong capital positions which exceed all capital adequacy ~~requirements~~re-quirements of federal regulatory authorities. Common Equity Tier I Capital “CET1” is a new regulatory ratio resulting from BASEL III. CET1 primarily consist of the Company’s and the Bank’s common shares, common share surplus, retained earnings and accumulated other comprehensive income. A Capital Conservation Buffer of .625% will increase the minimum CET1 and Total Capital ratios each year through 2019. The Company’s and the Bank’s capital ratios are presented in the following table.

	Ratio			Minimum Required For Capital Adequacy Purposes
September 30, 2015:
March 31, 2016:
Total Capital
(to Risk-Weighted Assets)
Surrey Bancorp (Consolidated)		2119.6140	%		8.0625	%
Surrey Bank & Trust		2119.5003	%		8.0625	%
Common Equity Tier I Capital
(to Risk-Weighted Assets)
Surrey Bancorp (Consolidated)		1816.2728	%		5.0125	%
Surrey Bank & Trust		2017.2376	%		5.0125	%
Tier I Capital
(to Risk-Weighted Assets)
Surrey Bancorp (Consolidated)		2018.3914	%		46.0	%
Surrey Bank & Trust		2017.2376	%		46.0	%
Tier I Capital
(to Average Assets)
Surrey Bancorp (Consolidated)		1314.9382	%		4.0	%
Surrey Bank & Trust		1314.8154	%		4.0	%
December 31, 2014:
December 31, 2015:
Total Capital
(to Risk-Weighted Assets)
Surrey Bancorp (Consolidated)		2120.5588	%		8.0	%
Surrey Bank & Trust		2120.1152	%		8.0	%
Common Equity Tier I Capital
(to Risk-Weighted Assets)
Surrey Bancorp (Consolidated)		~~n/a~~17.56	%		~~n/a~~4.5	%
Surrey Bank & Trust		~~n/a~~19.25	%		~~n/a~~4.5	%
Tier I Capital
(to Risk-Weighted Assets)
Surrey Bancorp (Consolidated)		2019.2961	%		46.0	%
Surrey Bank & Trust		19.8525	%		46.0	%
Tier I Capital
(to Average Assets)
Surrey Bancorp (Consolidated)		13.9374	%		4.0	%
Surrey Bank & Trust		13.6548	%		4.0	%

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED

Asset Quality

The Company actively monitors delinquencies, nonperforming assets and potential problem loans. Unsecured loans past due more than 90 days are placed into nonaccrual status. Secured loans reach nonaccrual status when they surpass 120 days past due. When facts and circumstances indicate the borrower has regained the ability to meet the required payments, the loan is returned to accrual status.

Management reviews all criticized loans on a periodic basis for possible charge offs. Any unsecured loans that are 90 plus days past due must be charged off in full. If secured, a reserve equal to the potential loss will be established. Any charge off must be reported to the Board of Directors within 30 days. On a monthly basis, a management report of recovery actions is provided to the Board of Directors.

Nonperforming assets are detailed below.

	September 30, 2015			December 31, 2014
	March 31, 2016			December 31, 2015
Nonaccrual loans	$	1,~~315~~097,~~021~~801		$	21,~~988~~192,~~949~~901
Loans past due 90 days and still accruing		~~110~~25,~~139~~986			5337,~~184~~488
Foreclosed assets		~~421~~365,~~491~~609			~~280~~384,~~821~~452
Total	$	1,~~846~~489,~~651~~396		$	31,~~322~~614,~~954~~841
Total assets	$	~~276~~260,~~915~~545,~~968~~029		$	~~253~~257,~~201~~776,~~323~~555
Ratio of nonperforming assets to total assets		0.6757	%		10.3163	%

At ~~September~~March 3031, ~~2015~~2016, the Bank had loans totaling $1,~~315~~097,~~021~~801 in nonaccrual status. Nonaccrual loans totaling $~~347~~613,~~789~~927 were current at the end of ~~September~~March. The guaranteed portion of nonaccrual loans at ~~September~~March 3031, ~~2015~~2016 is $~~414~~225,~~849~~555. Foreclosed assets at ~~September~~March 3031, ~~2015~~2016 primarily consist of 1-4 family ~~residential~~ and nonfarm, nonresidential properties. Loans that were considered impaired but were still accruing interest at ~~September~~March 3031, ~~2015~~2016, including troubled debt restructurings, totaled $3477,~~231,723~~761. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due under the contractual terms of the loan agreement. ~~Specific~~There ~~reserves~~were onno ~~nonaccrual~~specific ~~and~~reserves on impaired loans ~~totaled $4,869~~ at ~~September~~March 3031, ~~2015, or 0~~2016.~~1% of the balances outstanding.~~

Nonaccrual and impaired loans still accruing are summarized below:

	September 30, 2015		December 31, 2014
	March 31, 2016		December 31, 2015
Construction and development	$	1110,~~729~~380	$	1311,~~536~~061
1-4 family residential		1,~~293~~484,~~638~~716		~~601~~1,~~587~~149,257
Nonfarm, nonresidential		2,~~582~~209,~~894~~087		2,~~658~~640,~~937~~143
Commercial and industrial		~~644~~2,~~828~~113,933		12,~~399~~268,~~470~~676
Consumer		29,~~070~~135		81,~~854~~122
Other loans		115,~~585~~542		~~228~~11,~~111~~085
Total impaired and nonaccrual	$	45,~~546~~832,~~744~~793	$	46,~~910~~081,~~495~~344
Guaranteed portion	$	1,~~279~~159,~~212~~557	$	21,~~090~~575,~~348~~318

At ~~September~~March 3031, ~~2015~~2016, consumer loans totaling $~~186~~477,~~695~~761 are included above that were not individually evaluated for impairment in the determination of the allowance for loan loss reserve (See Note 6). These loans are primarily home equity loans collateralized by 1-4 family properties which are considered consumer loans. ~~These~~Nonaccrual loans ~~are~~included onin ~~nonaccrual~~this ~~status~~pool atamounted ~~September~~to 30$224,532 ~~2015~~at ~~and~~March ~~therefore~~31, ~~considered impaired~~2016.

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED

The loan portfolio is dominated by real estate and commercial loans. The general composition of the loan portfolio is as follows:

	September 30, 2015				December 31, 2014
	March 31, 2016				December 31, 2015
Construction and development	$	69,~~484~~613,~~974~~485	34.2756	%	$	109,~~061~~669,~~249~~380	54.2180	%
1-4 family residential		4143,~~938~~710,~~912~~878	2120.1275	%		4143,~~824~~830,~~806~~689	21.6777	%
Multi-family		1,~~178~~126,~~251~~153	0.5953	%		1,~~109~~155,~~586~~535	0.57	%
Farmland		36,~~360~~243,~~755~~947	12.6997	%		36,~~486~~043,~~002~~944	13.8100	%
Nonfarm, nonresidential		8388,~~725~~623,~~388~~068	42.1707	%		7482,~~275~~595,~~793~~636	3841.4802	%
Total real estate		~~136~~149,~~688~~317,~~280~~531	6870.8488	%		~~130~~143,~~757~~295,~~436~~184	6771.7416	%
Agricultural		41,~~846~~473,~~125~~015	20.4470	%		~~675~~1,~~474~~609,150	0.3580	%
Commercial and industrial		5255,~~651~~375,~~131~~294	26.5228	%		5651,~~602~~930,~~425~~870	2925.3279	%
Consumer		4,~~373~~508,~~523~~500	2.2014	%		4,~~997~~532,~~023~~179	2.5925	%
Total loans	$	~~198~~210,~~559~~674,~~059~~340	100.00	%	$	~~193~~201,~~032~~367,~~358~~383	100.00	%

The concentrations represented above do not, based on managements’ assessment, expose the Bank to any unusual concentration risk. Based on the Bank’s asset size, the concentrations that are above area peer group analysis are nonfarm nonresidential and commercial and industrial loans. Management recognizes the inherent risk associated with commercial real estate and commercial lending, including a borrower's actual results of operations not corresponding to those projected by the borrower when the loan was funded; economic factors such as the number of housing starts and increases in interest rates, etc.; depression of collateral values; and completion of projects within the original cost and time estimates. The Bank mitigates some of that risk by actively seeking government guarantees on these loans. Collectively, the Bank has approximately $6261,~~186~~293,~~279~~478 in loans that carry government guarantees. The guaranteed portion of these loans amounts to $4948,~~712~~862,~~898~~969 at ~~September~~March 3031, ~~2015~~2016. Loan guarantees by loan class are below:

	September 30, 2015		Guaranteed Portion
	March 31,		Guaranteed Portion
			Amount		Percentage
	2016		Amount		Percentage
Construction and development	$	69,~~484~~613,~~974~~485	$	1488,~~649~~347		0.2392	%
1-4 family residential		4143,~~938~~710,~~912~~878		587,~~856~~785		1.4034	%
Multi-family		1,~~178~~126,~~251~~153		52,~~792~~771		0.4925	%
Farmland		36,~~360~~243,~~755~~947		~~746~~699,~~605~~066		2211.2220	%
Nonfarm, nonresidential		8388,~~725~~623,~~388~~068		3635,~~717~~945,~~790~~363		4340.8656	%
Total real estate		~~136~~149,~~688~~317,~~280~~531		3837,~~072~~323,~~692~~332		2725.8500	%
Agricultural		41,~~846~~473,~~125~~015		-		-	%
Commercial and industrial		5255,~~651~~375,~~131~~294		11,~~640~~539,~~206~~637		2220.1184	%
Consumer		4,~~373~~508,~~523~~500		-		-	%
Total loans	$	~~198~~210,~~559~~674,~~059~~340	$	4948,~~712~~862,~~898~~969		2523.0419	%

Loans in higher risk categories, such as non-owner occupied nonfarm, non-residential property and commercial real estate construction represent a ~~small~~smaller segment of our loan portfolio. Commercial construction loans included in construction and development loans amounted to $17,~~826~~824,~~771~~090, or 03.9271% of total loans at ~~September~~March 3031, ~~2015~~2016. Non-owner occupied nonfarm, non-residential properties included in nonfarm, non-residential loans above amounted to $1521,~~234~~990,~~281~~397, or 710.6744% of total loans at ~~September~~March 3031, ~~2015~~2016.

The ~~consolidated~~reserve ~~provision~~ for loan losses ~~was~~on ~~$85~~March 31,~~717~~ ~~for~~2016, ~~the~~was ~~first~~$3,800,316 ~~nine~~or ~~months~~1.80% of ~~2015~~period ~~compared~~end toloans. ~~$132,952~~This ~~for~~percentage ~~the~~is ~~same~~derived ~~period~~from intotal ~~2014~~loans. ~~Gross~~Approximately ~~loans increased~~ $561,~~526~~293,~~701~~478 ~~from~~of ~~December~~total ~~31,~~loans ~~2014~~outstanding toat ~~September~~March 3031, ~~2015. However~~2016, ~~the~~are ~~percentage~~government ofguaranteed loans ~~carrying~~which ~~government~~carry guarantees ~~increased~~ranging from ~~$45,141,818,~~49% orto ~~23.4~~100% of ~~gross~~the ~~loans~~outstanding atloan balance. When the ~~end~~guaranteed portion of ~~2014~~the toloans, ~~$49~~for which the Bank has no credit exposure,~~712,898,~~ oris 25removed from the equation the loan loss reserve is approximately 2.0435% of ~~gross~~outstanding loans. At atDecember ~~September 30~~31, 2015 the loan loss reserve percentage was 1.80% ~~The~~of ~~decreased~~total ~~credit~~loans ~~exposure~~and ~~resulted~~2.40% inof ~~lower~~loans ~~reserves~~net of government guarantees.

The reserve for loan losses on September 30, 2015, was $3,567,517 or 1.80% of period end loans. This percentage is derived from total loans. Approximately $62,186,000 of total loans outstanding at September 30, 2015, are government guaranteed loans which carry guarantees ranging from 49% to 100% of the outstanding loan balance. When the guaranteed portion of the loans, for which the Bank has no credit exposure, is removed from the equation the loan loss reserve is approximately 2.39% of outstanding loans. At December 31, 2014 the loan loss reserve percentage was 1.83% of total loans and 2.40% of loans net of government guarantees.27

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED

The level of reserve is established based upon management's evaluation of historical loss data and the effects of certain environmental factors on the loan portfolio. The historical loss portion of the reserve is computed using the average loss data from the past applied to its corresponding category of loans. However, historical losses only reflect a small portion of the Bank’s loan loss reserve. The environmental factors represent risk from external economic influences on the credit quality of the loan portfolio. These factors include the movement of interest rates, unemployment rates, past due and charge off trends, loan grading migrations, movement in collateral values and the Bank’s exposure to certain loan concentrations. Positive or negative movements in any of these factors have an effect on the credit quality of the loan portfolio. As a result, management continues to actively monitor the Bank's asset quality affected by these environmental factors. The following table is a summary of loans past due at ~~September~~March 3031, ~~2015~~2016 and December 31, ~~2014~~2015.

	September 30, 2015						December 31, 2014
	March 31, 2016						December 31, 2015
	30-89 Days			90 Days Plus			30-89 Days			90 Days Plus
Construction and development	$	-		$	-		$	~~94,736~~-		$	-
1-4 family residential		~~771~~310,~~352~~658			~~413~~319,~~710~~279			~~637~~807,~~000~~840			~~172~~277,~~981~~572
Nonfarm, non-residential		~~605~~693,~~372~~425			~~317~~157,~~421~~605			~~243~~607,~~206~~890			~~663~~320,~~902~~924
Commercial and industrial		~~770~~823,~~580~~241			~~185~~9,~~300~~496			84821,~~221~~217			1193,~~271,937~~165
Consumer		~~145~~160,~~201~~856			4417,~~467~~638			~~218~~134,~~680~~277			5527,~~428~~242
Other loans		-			-5,543			-11,085			-
	$	21,~~292~~988,~~505~~180		$	~~960~~509,~~898~~861		$	12,~~277~~382,~~843~~309		$	2818,~~164,248~~903
Non-accrual loans included above	$	~~116,473~~-		$	-483,874		$	~~370~~111,~~697~~573		$	2781,~~109,942~~415
Guaranteed portion	$	1153,~~103,256~~132		$	~~356~~7,~~612~~520		$	~~100~~348,~~869~~362		$	1362,~~935,839~~297
Ratio to total loans		10.1594	%		0.4824	%		01.6618	%		10.1241	%
Ratio to total loans, net of guarantees		01.8014	%		0.4131	%		01.8034	%		0.1530	%

Past due loans are reviewed weekly and collection efforts assessed to determine potential problems arising in the loan portfolio. Proactive monitoring of past due accounts allows management to anticipate trends within the portfolio and make appropriate adjustments to collection efforts and to the allowance for loan losses. Collectively, past dues decreased from December 31, ~~2014~~2015 to ~~September~~March 3031, ~~2015~~2016. The ~~decrease is in the 90 day plus time frame, as the 30-89 day plus time frame increased. The~~ largest decrease ~~was~~is in ~~commercial and industrial loans 90 days past due. The largest increase was in commercial and industrial loans 30~~1-894 ~~days~~family ~~past~~residential ~~due. Collectively commercial and industrial~~ loans ~~past~~which ~~due~~collectively decreased $~~400~~455,~~278~~475.

Net of loan guarantees, total past dues have ~~increased~~decreased from $12,~~405~~490,~~383~~553 at December 31, ~~2014~~2015, to $12,~~793~~337,~~535~~389 at ~~September~~March 3031, ~~2015~~2016, or ~~27.~~6.2%. Total past due loans at ~~September~~March 3031, ~~2015~~2016 consist of fifty-~~nine~~three loans with an average balance of $5547,~~142~~133, compared to ~~fifty~~sixty-~~seven~~nine loans at December 31, ~~2014~~2015, with an average balance of $6046,~~388~~394. Loans over $250,000 delinquent at ~~September~~March 3031, ~~2015~~2016 and December 31, ~~2014~~2015 amounted to $1,~~441~~046,~~436~~011 and $1945,~~223~~434,~~882,~~ respectively. The ~~September~~March 2015 and December ~~2014~~2015 totals consist of ~~four~~two ~~and three~~ loans, respectively, one of which isare the same. The guaranteed portion ofDecember ~~these~~31, ~~loans~~2015 atwas ~~September 30~~$202,020. ~~2015~~None ~~and~~of ~~December~~the ~~31,~~loans ~~2014,~~at isMarch ~~$835~~31,~~507~~ ~~and~~2016 ~~$1,072,042,~~carried ~~respectively~~government guarantees.

Management believes that its loan portfolio is sufficiently diversified such that a downturn in a particular market or industry will not have a significant impact on the loan portfolio or the Bank's financial condition. Management believes that its provision and reserve offer an adequate allowance for loan losses and provide an appropriate reserve for the loan portfolio. The Bank lends primarily in Surry County, North Carolina and Patrick Country, Virginia and surrounding counties.

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED

Interest Rate Sensitivity and Liquidity

One of the principal duties of the Bank's Asset/Liability Committee is management of interest rate risk. The Bank utilizes quarterly asset/liability reports prepared by a regional correspondent bank to project the impact on net interest income that might occur with hypothetical interest rate changes. The committee monitors and manages asset and liability strategies and pricing.

Another function of the Asset/Liability Committee is maintaining adequate liquidity and planning for future liquidity needs. Having adequate liquidity means the ability to meet current funding needs, including deposit withdrawals and commitments, in an orderly manner without sacrificing earnings. The Bank funds its investing activities, including making loans and purchasing investments, by attracting deposits and utilizing short-term borrowings when necessary.

At ~~September~~March 3031, ~~2015~~2016, the liquidity position of the Company was excellent, in management’s opinion, with short-term liquid assets of $6637,~~050~~041,~~559~~115 compared to $4945,~~129~~354,~~109~~230 at December 31, ~~2014~~2015. To provide supplemental liquidity, the Bank has seven unsecured lines of credit with correspondent banks totaling $35,500,000. At ~~September~~March 3031, ~~2015~~2016, there were no advances against these lines. Additionally, the Bank has a secured borrowing arrangement with the Federal Home Loan Bank (FHLB). The maximum credit available under this agreement approximates $9,~~374~~924,000 of which $41,~~250~~750,000 had been advanced at ~~September~~March 3031, ~~2015~~2016.

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ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable as a “Smaller Reporting Company”.

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ITEM 4.

CONTROLS AND PROCEDURES

As of the end of the period covered by the report, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15e. Based on the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective. There have not been any changes in the Company’s internal control over financial reporting that occurred during the Company’s last quarter that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

None

Item 1A.

Risk Factors

Not Applicable as a “Smaller Reporting Company”

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3.

Defaults Upon Senior Securities

Not Applicable

Item 4.

Mine Safety Disclosures

Not Applicable

Item 5.

Other Information

None

Item 6.

Exhibits

31.1

Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act

31.2

Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act

32.1

Certification of PEO/PFO Pursuant to Section 906 of the Sarbanes Oxley Act

101

Interactive Data File

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized officers.

	Surrey Bancorp
Date: November 12, 2015	/s/ Edward C. Ashby, III
Date: May, 12, 2016	/s/ Edward C. Ashby, III
	Edward C. Ashby, III
	President and Chief Executive Officer
	(Principal Executive Officer)
Date: November 12, 2015	/s/ Mark H. Towe
Date: May 12, 2016	/s/ Mark H. Towe
	Mark H. Towe
	Sr. Vice President and Chief Financial Officer
	(Principal Financial Officer)

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