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2009 Annual Report

 

 

Table of Contents

 

Letter to Stockholders

   1

Financial Highlights Summary

   2

Consolidated Balance Sheets

   3

Consolidated Statements of Income

   4

Consolidated Statements of Changes in Stockholders’ Equity

   5

Consolidated Statements of Cash Flows

   7

Notes to Consolidated Financial Statements

   9

Report of Independent Registered Public Accounting Firm

   38

Management’s Discussion and Analysis

   39

Board of Directors and Officers

   57

Stockholder Information

   58


Dear Shareholder:

Surrey Bancorp had a very profitable year in 2009, compared to other financial institutions. Earnings improved significantly over 2008, but remained below levels reported in 2007 and before. The bank strengthened its capital base in 2009 through retained earnings and the sale of preferred stock to the U.S. Treasury under the Capital Purchase Program. Surrey Bancorp is one of the more highly capitalized financial institutions in North Carolina. This allows us to continue our lending activities in a challenging economic environment and to take advantage of sensible growth opportunities, should they arise.

The Company reported net income of $2,232,294 or $0.58 per fully diluted common share in 2009. This was a 47.4% increase over 2008 profits of $1,514,565 or $0.42 per fully diluted common share. The increased earnings were attributable to the receipt of tax-exempt insurance proceeds of $1,000,000 in the Bank’s sales finance subsidiary. Net interest income increased to $7,620,899 in 2009, a 10.1% improvement over the previous year due to reductions in deposit costs. Non-interest income, excluding life insurance proceeds, totaled $2,511,411, and was essentially flat compared to the previous year. Provisions for loans losses doubled in 2009 because of increases in impaired and non-performing loans, a reflection of our distressed economy. The provision totaled $1,604,947 in 2009, compared to $799,913 in 2008. Non-interest expense increased 4.9% to $6,583,745 in 2009. This was due to increases in FDIC insurance premiums and personnel-related costs.

Total assets as of December 31, 2009, were $216,949,782, an increase of 6.3% over the previous year. Total deposits also increased by 6.3% in 2009, and totaled $173,974,558 at year end. Loans, net of the allowance for losses, increased to $180,442,154, a 4.9% increase over the prior year.

Asset quality, appropriate provisions for loan losses, and capital adequacy are being closely monitored by bank regulators and investors. Our non-performing assets at year end totaled 0.66% of total assets. Loan loss reserves were $4,669,905 or 2.52% of total loans at the end of 2009. These reserves equal 101% of impaired and non-performing assets, net of government guarantees. Impaired loans plus non-performing assets, net of government guarantees, total 13.97% of the bank’s loan loss reserve and capital. The bank’s asset quality is within industry standards, and our reserve and capital position exceeds industry standards.

The financial performance of a community bank generally mirrors the economic conditions in which it operates. The economic challenges we are experiencing on a local, state and national level are expected to continue throughout the year. As a result, asset quality and earnings will remain under pressure. I am confident Surrey Bancorp will remain an industry leader in profitability and capital adequacy by staying committed to the sound banking principles that have guided us from our inception in 1996.

On behalf of the employees, management and the Board of Directors Surrey Bancorp, thank you for your support.

 

/s/ Edward C. Ashby, III

Edward C. Ashby, III
President & CEO

 

1


 

Financial Highlights Summary1

 

 

     2009     2008     2007     2006     2005  

Summary of Operations

          

Interest income

   $ 10,847      $ 12,356      $ 15,024      $ 13,452      $ 10,673   

Interest expense

     3,226        5,436        6,450        5,181        3,647   
                                        

Net interest income

     7,621        6,920        8,574        8,271        7,026   

Provision for loan losses

     1,605        800        718        614        461   

Other income

     3,511        2,498        2,618        2,045        2,059   

Other expense

     6,584        6,279        6,120        5,590        5,219   

Income taxes

     711        825        1,569        1,461        1,204   
                                        

Net income

     2,232        1,514        2,785        2,651        2,201   

Preferred stock dividends declared

     (258     (119     (119     (119     (119
                                        

Net income available to common stockholders

   $ 1,974      $ 1,395      $ 2,666      $ 2,532      $ 2,082   
                                        

Per Common Share Data2

          

Net income:

          

Basic

   $ 0.62      $ 0.44      $ 0.85      $ 0.85      $ 0.71   

Diluted

     0.58        0.42        0.78        0.76        0.63   

Cash dividends declared

     n/a        n/a        0.15        n/a        n/a   

Book value per common share

     7.44        6.87        6.44        5.80        4.97   

Balance Sheet

          

Loans, net

   $ 180,442      $ 172,080      $ 166,457      $ 153,852      $ 142,385   

Investment securities

     2,012        2,161        3,118        3,649        4,129   

Total assets

     216,950        204,178        210,957        187,110        179,571   

Deposits

     173,975        163,747        171,180        151,091        145,856   

Stockholders’ equity

     28,425        24,383        22,983        20,027        17,261   

Interest-earning assets

     206,604        194,310        200,005        180,958        173,593   

Interest-bearing liabilities

     162,215        154,170        157,943        141,425        137,555   

Selected Ratios

          

Return on average assets

     1.07     0.74     1.41     1.47     1.30

Return on average equity

     8.07     6.36     12.60     14.16     13.64

Dividends declared on common stock as a percent of net income

     n/a        n/a        17.80     n/a        n/a   

 

1. In thousands of dollars, except per share data.
2. Adjusted for the effects of a common stock split effected in the form of a 20% common stock dividend declared on February 3, 2006, and a 2 for 1 common stock split effected in the form of a common stock dividend declared on December 28, 2006.

 

2


 

Consolidated Balance Sheets

December 31, 2009 and 2008

 

 

      2009     2008  

Assets

    

Cash and due from banks

   $ 1,923,621      $ 1,293,770   

Interest-bearing deposits with banks

     19,067,374        16,503,318   

Federal funds sold

     412,947        200,000   

Investment securities available for sale

     2,011,925        2,160,782   

Restricted equity securities

     1,047,514        1,047,464   

Loans, net of allowance for loan losses of $4,669,905 in 2009 and $3,365,370 in 2008

     180,442,154        172,080,251   

Property and equipment, net

     4,881,770        5,044,526   

Foreclosed assets

     53,336        50,414   

Accrued interest and other income

     1,032,989        1,008,498   

Goodwill

     120,000        120,000   

Bank owned life insurance

     3,173,307        3,062,150   

Other assets

     2,782,845        1,606,842   
                

Total assets

   $ 216,949,782      $ 204,178,015   
                

Liabilities and Stockholders’ Equity

    

Liabilities

    

Deposits:

    

Noninterest-bearing

   $ 24,709,970      $ 24,161,085   

Interest-bearing

     149,264,588        139,586,027   
                

Total deposits

     173,974,558        163,747,112   

Federal funds purchased and securities sold under agreements to repurchase

     —          2,144,186   

Short-term debt

     3,750,000        1,740,000   

Long-term debt

     9,200,000        10,700,000   

Dividends payable

     44,603        29,987   

Accrued interest payable

     291,111        500,694   

Other liabilities

     1,264,158        933,033   
                

Total liabilities

     188,524,430        179,795,012   
                

Commitments and contingencies

     —          —     

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   

2,000 shares of Series B, issued and outstanding with no par value, fixed rate (5%) cumulative perpetual, with a liquidation value of $1,000 per share, net of accreted discount;

     1,903,283        —     

100 shares of Series C, issued and outstanding with no par value, fixed rate (9%) cumulative perpetual, with a liquidation value of $1,000 per share, net of amortized premium

     103,222        —     

Common stock, 5,000,000 shares authorized at no par value; 3,198,105 shares issued in 2009 and 3,167,568 shares issued in 2008

     9,406,429        9,270,253   

Retained earnings

     14,468,089        12,493,763   

Accumulated other comprehensive loss

     (75,996     (1,338
                

Total stockholders’ equity

     28,425,352        24,383,003   
                

Total liabilities and stockholders’ equity

   $ 216,949,782      $ 204,178,015   
                

See Notes to Consolidated Financial Statements

 

3


 

Consolidated Statements of Income

For the years ended December 31, 2009, 2008 and 2007

 

 

     2009     2008     2007  

Interest income

      

Loans and fees on loans

   $ 10,756,956      $ 11,912,386      $ 13,797,058   

Federal funds sold

     559        7,131        20,375   

Investment securities, taxable

     68,283        138,372        213,118   

Deposits with banks

     21,564        298,362        993,791   
                        

Total interest income

     10,847,362        12,356,251        15,024,342   
                        

Interest expense

      

Deposits

     2,787,160        4,849,164        5,766,590   

Federal funds purchased and securities sold under agreements to repurchase

     400        6,716        30,612   

Short-term debt

     25,744        11,545        —     

Long-term debt

     413,159        568,357        653,381   
                        

Total interest expense

     3,226,463        5,435,782        6,450,583   
                        

Net interest income

     7,620,899        6,920,469        8,573,759   

Provision for loan losses

     1,604,947        799,913        717,629   
                        

Net interest income after provision for loan losses

     6,015,952        6,120,556        7,856,130   
                        

Noninterest income

      

Service charges on deposit accounts

     1,155,363        1,153,707        1,125,212   

Gain on sale of government guaranteed loans

     —          —          147,840   

Fees and yield spread premiums on loans delivered to correspondents

     155,804        136,316        209,722   

Other service charges and fees

     382,891        368,678        340,914   

Other operating income

     817,353        839,410        794,245   

Life insurance proceeds

     1,000,000        —          —     
                        

Total noninterest income

     3,511,411        2,498,111        2,617,933   
                        

Noninterest expense

      

Salaries and employee benefits

     3,347,410        3,207,384        3,063,889   

Occupancy expense

     413,175        410,489        374,945   

Equipment expense

     275,862        322,824        330,094   

Data processing

     382,003        365,017        379,042   

Foreclosed assets, net

     97,974        43,260        44,367   

Postage/printing and supplies

     212,948        229,841        215,313   

Professional fees

     299,144        251,747        311,513   

FDIC insurance premiums

     317,363        103,033        100,167   

Other expense

     1,237,866        1,345,791        1,300,640   
                        

Total noninterest expense

     6,583,745        6,279,386        6,119,970   
                        

Net income before income taxes

     2,943,618        2,339,281        4,354,093   

Income tax expense

     711,324        824,716        1,568,887   
                        

Net income

     2,232,294        1,514,565        2,785,206   

Preferred stock dividends and accretion of discount

     (257,968     (119,295     (119,295
                        

Net income available to common stockholders

   $ 1,974,326      $ 1,395,270      $ 2,665,911   
                        

Basic earnings per common share

   $ 0.62      $ 0.44      $ 0.85   
                        

Diluted earnings per common share

   $ 0.58      $ 0.42      $ 0.78   
                        

Basic weighted average common shares outstanding

     3,192,566        3,165,891        3,126,834   
                        

Diluted weighted average common shares outstanding

     3,594,178        3,586,927        3,564,272   
                        

Dividends declared per common share

   $ —        $ —        $ 0.15   
                        

See Notes to Consolidated Financial Statements

 

4


 

Consolidated Statements of Changes in Stockholders’ Equity

For the years ended December 31, 2009, 2008 and 2007

 

 

     Convertible
Preferred Stock Series A
   Preferred Stock Series B    Preferred Stock Series C    Common Stock    Retained     Unrealized
Appreciation
(Depreciation) on
       
     Shares    Amount    Shares    Amount    Shares    Amount    Shares    Amount    Earnings     Securities     Total  

Balance, December 31, 2006

   189,356    $ 2,620,325    —      $ —      —      $ —      3,002,168    $ 8,461,247    $ 8,950,342      $ (4,460   $ 20,027,454   

Comprehensive income

                              

Net income

   —        —      —        —      —        —      —        —        2,785,206        —          2,785,206   

Net change in unrealized gain on investment securities available for sale, net of income tax of $4,735

   —        —      —        —      —        —      —        —        —          7,548        7,548   
                                    

Total comprehensive income

                                 2,792,754   

Common stock options exercised

   —        —      —        —      —        —      160,596      186,467      —          —          186,467   

Tax benefit related to exercise of non-qualified stock options

   —        —      —        —      —        —      —        565,076      —          —          565,076   

Stock-based compensation, net of tax benefit

   —        —      —        —      —        —      —        5,149      —          —          5,149   

Dividends declared on common stock ($0.15 per share)

   —        —      —        —      —        —      —        —        (474,414    

Dividends declared on convertible Series A preferred stock ($.63 per share)

   —        —      —        —      —        —      —        —        (119,295     —          (119,295
                                                                        

Balance, December 31, 2007

   189,356      2,620,325    —        —      —        —      3,162,764      9,217,939      11,141,839        3,088        22,983,191   

Cumulative effect of initial adoption of ASC 715-60

   —        —      —        —      —        —      —        —        (43,346     —          (43,346
                                                                        

Balance, January 1, 2008

   189,356      2,620,325    —        —      —        —      3,162,764      9,217,939      11,098,493        3,088        22,939,845   

Net income

   —        —      —        —      —        —      —        —        1,514,565        —          1,514,565   

Net change in unrealized gain (loss) on investment securities available for sale, net of income tax of $2,777

   —        —      —        —      —        —      —        —        —          (4,426     (4,426
                                    

Total comprehensive income

                                 1,510,139   

Common stock options exercised

   —        —      —        —      —        —      4,804      18,132      —          —          18,132   

Stock-based compensation, net of tax benefit

   —        —      —        —      —        —      —        34,182      —          —          34,182   

Dividends declared on convertible Series A preferred stock ($.63 per share)

   —        —      —        —      —        —      —        —        (119,295     —          (119,295
                                                                        

Balance, December 31, 2008

   189,356    $ 2,620,325    —      $ —      —      $ —      3,167,568    $ 9,270,253    $ 12,493,763      $ (1,338   $ 24,383,003   
                                                                        

Continued

 

5


 

Consolidated Statements of Changes in Stockholders’ Equity, continued

For the years ended December 31, 2009, 2008 and 2007

 

 

     Convertible
Preferred Stock Series A
   Preferred Stock Series B     Preferred Stock Series C     Common Stock    Retained     Unrealized
Appreciation
(Depreciation) on
       
     Shares    Amount    Shares    Amount     Shares    Amount     Shares    Amount    Earnings     Securities     Total  

Balance, December 31, 2008

   189,356    $ 2,620,325    —      $ —        —      $ —        3,167,568    $ 9,270,253    $ 12,493,763      $ (1,338   $ 24,383,003   

Net income

   —        —      —        —        —        —        —        —        2,232,294        —          2,232,294   

Net change in unrealized gain (loss) on investment securities available for sale, net of income tax of $46,836

   —        —      —        —        —        —        —        —        —          (74,658     (74,658
                                  

Total comprehensive income

                               2,157,636   

Common stock options exercised

   —        —      —        —        —        —        30,537      86,238      —          —          86,238   

Tax benefit related to exercise of non-qualified stock options

   —        —      —        —        —        —        —        19,903      —          —          19,903   

Stock-based compensation, net of tax benefit

   —        —      —        —        —        —        —        30,035      —          —          30,035   

Issue Series B preferred stock to the U.S. Treasury, net of issuance costs

   —        —      2,000      1,975,015      —        —        —        —        —          —          1,975,015   

Issue Series C preferred stock to the U.S. Treasury

   —        —      —        (106,000   100      106,000      —        —        —          —          —     

Dividends declared on convertible Series A preferred stock ($.63 per share)

   —        —      —        —        —        —        —        —        (119,294     —          (119,294

Dividends declared and accrued on Series B and Series C preferred stock, net of discount accretion and (premium) amortization

   —        —      —        34,268      —        (2,778   —        —        (138,674     —          (107,184
                                                                          

Balance, December 31, 2009

   189,356    $ 2,620,325    2,000    $ 1,903,283      100    $ 103,222      3,198,105    $ 9,406,429    $ 14,468,089      $ (75,996   $ 28,425,352   
                                                                          

See Notes to Consolidated Financial Statements

 

6


 

Consolidated Statements of Cash Flows

For the years ended December 31, 2009, 2008 and 2007

 

 

     2009     2008     2007  

Cash flows from operating activities

      

Net income

   $ 2,232,294      $ 1,514,565      $ 2,785,206   

Adjustments to reconcile net income to net cash provided by operations:

      

Depreciation and amortization

     279,036        314,241        314,933   

Provision for loan losses

     1,604,947        799,913        717,629   

Loss on the sale of foreclosed assets

     29,244        43,260        44,367   

Stock-based compensation

     30,035        34,182        5,149   

(Gain) loss on disposal of property and equipment

     (320     15,693        (3,046

Deferred income taxes

     (559,407     (228,008     (198,034

Accretion of discount on securities, net of amortization of premiums

     10,346        (8,023     (57,283

Changes in assets and liabilities:

      

Accrued income

     (24,491     196,749        (158,104

Increase in cash surrender value of life insurance

     (111,157     (109,130     (105,883

Other assets

     (569,760     (126,267     107,521   

Accrued interest payable

     (209,583     (130,503     26,304   

Other liabilities

     331,125        34,861        172,266   
                        

Net cash provided by operating activities

     3,042,309        2,351,533        3,756,908   
                        

Cash flows from investing activities

      

Net (increase) decrease in interest-bearing deposits with banks

     (2,564,056     10,745,181        (10,629,521

Net (increase) decrease in federal funds sold

     (212,947     200,000        9,000   

Purchases of investment securities

     (1,999,663     (4,558,260     (4,447,272

Maturities of investment securities

     2,016,680        5,516,631        5,047,251   

Purchases of restricted equity securities

     (168,950     (53,450     (77,184

Redemption of restricted equity securities

     168,900        —          134,400   

Net increase in loans

     (10,185,364     (6,667,952     (13,884,835

Proceeds from the sale of foreclosed assets

     186,348        239,754        506,708   

Proceeds from sale of property and equipment

     320        4,715        9,900   

Purchases of property and equipment

     (116,280     (477,078     (780,627
                        

Net cash provided by (used in) investing activities

     (12,875,012     4,949,541        (24,218,063
                        

Cash flows from financing activities

      

Net increase (decrease) in deposits

     10,227,446        (7,433,120     20,088,962   

Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase

     (2,144,186     1,996,859        (362,468

Net increase in short-term debt

     2,010,000        1,740,000        —     

Net increase (decrease) in long-term debt

     (1,500,000     (3,956,117     492,630   

Dividends paid on preferred stock

     (211,862     (119,295     (119,295

Dividends paid on common stock

     —          (474,496     —     

Common stock options exercised

     86,238        18,132        186,467   

Proceeds from the issuance of preferred stock, net

     1,975,015        —          —     

Tax benefit related to exercise of non-qualified stock options

     19,903        —          565,076   
                        

Net cash provided by (used in) financing activities

     10,462,554        (8,228,037     20,851,372   
                        

Net increase (decrease) in cash and cash equivalents

     629,851        (926,963     390,217   

Cash and due from banks, beginning

     1,293,770        2,220,733        1,830,516   
                        

Cash and due from banks, ending

   $ 1,923,621      $ 1,293,770      $ 2,220,733   
                        

Continued

 

7


 

Consolidated Statements of Cash Flows, continued

For the years ended December 31, 2009, 2008 and 2007

 

 

     2009    2008    2007

Supplemental disclosures of cash flow information

        

Interest paid

   $ 3,436,046    $ 5,566,285    $ 6,424,279
                    

Income taxes paid

   $ 1,049,854    $ 1,231,235    $ 1,096,476
                    

Loans transferred to foreclosed properties

   $ 218,514    $ 244,588    $ 562,412
                    

See Notes to Consolidated Financial Statements

 

8


 

Notes to Consolidated Financial Statements

 

 

Note 1. Organization and Summary of Significant Accounting Policies

Organization

Surrey Bancorp (the “Company”) 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. Shareholders of the Bank received six shares of Surrey Bancorp common shares for every five shares of Surrey Bank & Trust common shares owned. The Company is subject to regulation by the Federal Reserve.

Surrey Bank & Trust (the “Bank”) 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 U-VEST.

On July 31, 2000, Surrey Bank & Trust formed Freedom Finance, LLC (originally named Friendly 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 and subsidiaries follow U.S. generally accepted accounting principles and general practices within the financial services industry. Following is a summary of the more significant policies.

Critical Accounting Policies

Management believes the 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 the Board of Directors.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, the Bank, and Subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

Business Segments

The Company reports its activities in two business segments. In determining the appropriateness of segment definition, the Company considers the materiality of potential business segments and components of the business about which financial information is available and regularly evaluated relative to resource allocation and performance assessment. For more information on business segments see Note 21.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

9


 

Notes to Consolidated Financial Statements

 

 

 

Note 1. Organization and Summary of Significant Accounting Policies, continued

 

Use of Estimates, continued

 

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for loan and foreclosed real estate losses, management obtains independent appraisals for significant properties.

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

While management uses available information to recognize loan and foreclosed real estate losses, future additions to the allowances may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as a part of their routine examination process, periodically review the Company’s allowances for loan and foreclosed real estate losses. Such agencies may require the Company to recognize additions to the allowances based on their judgments about information available to them at the time of their examinations. Because of these factors, it is reasonably possible that the allowances for loan and foreclosed real estate losses may change materially in the near term.

Cash and Due from Banks

For the purpose of presentation in the statement of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption “cash and due from banks.”

Interest-bearing Deposits with Banks

Interest-bearing deposits with banks mature within one year and are carried at cost. These deposits are primarily at the Federal Home Loan Bank of Atlanta, which sweeps excess funds out nightly and invests the funds in accounts that pay a daily rate that mirrors the federal funds rate, and the Federal Reserve Bank. Other deposits included in this category are short-term certificates of deposit issued through the Certificate of Deposit Account Registry Service (CDARS).

Trading Securities

The Company does not hold securities for short-term resale and therefore does not maintain a trading securities portfolio.

Securities Held to Maturity

Bonds, notes, and debentures for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity or to call dates. No securities held by the Company for the periods presented were classified as held to maturity.

Securities Available for Sale

Available for sale securities are reported at fair value and consist of bonds, notes, debentures, and certain equity securities 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 and are recorded on a trade-date basis. Premiums and discounts are recognized in interest income using the interest method over the period to maturity or to call dates.

 

10


 

Notes to Consolidated Financial Statements

 

 

 

Note 1. Organization and Summary of Significant Accounting Policies, continued

 

Securities Available for Sale, continued

 

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. In determining whether other than temporary impairment exist, management considers many factors, including (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 the 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.

Loans Held for Sale

Government guaranteed loans originated in the normal course of business are sometimes sold into the secondary market. These sales are of the guaranteed portion of the loans only. Loans that carry variable rates, which eliminate the market risk to the Bank, are carried at cost. Fixed rate loans are carried the lower of cost or market.

Loans Receivable

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal amount adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs 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.

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 collectibility 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.

 

11


 

Notes to Consolidated Financial Statements

 

 

 

Note 1. Organization and Summary of Significant Accounting Policies, continued

 

Allowance for Loan Losses, continued

 

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.

Property and Equipment

Land is carried at cost. Premises, furniture and equipment, and leasehold improvements are carried at cost, less accumulated depreciation and amortization computed principally by the straight-line method over the following estimated useful lives:

 

     Years

Buildings and improvements

   10-40

Furniture and equipment

   3-25

Foreclosed Assets

Assets acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value less anticipated cost to sell at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management, and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in foreclosed asset expense. The historical average holding period for such properties is less than six months.

Goodwill

Goodwill consists of premiums paid on acquisitions of insurance agencies. Goodwill is evaluated for impairment on an annual basis. Any impairment is charged against income in the period of impairment.

Employee Benefit Plans

The Company has a defined contribution plan qualifying under IRS Code Section 401(k). Beginning in 2008, employee contributions are matched by the Company up to the first six percent of an employee’s contribution. In years before 2008 the Company match was up to the first four percent of an employee’s contribution. The Company match is expensed as incurred.

The Company has a noncontributory, nonqualified supplemental executive retirement plan (“SERP”) covering certain executive employees. The plan calls for monthly payments payable for the life of the executive, generally beginning at the age of 65. The SERP costs, which are actuarially determined and recorded on an unfunded basis, are charged to current operations and credited to a liability account on the consolidated balance sheet.

 

12


 

Notes to Consolidated Financial Statements

 

 

 

Note 1. Organization and Summary of Significant Accounting Policies, continued

 

Employee Benefit Plans, continued

 

The Company has a deferred compensation plan under which directors may elect to defer their directors’ fees. Participating directors receive an additional 30% matching contribution from the Company. Benefit payments are paid for a specific number of years, generally beginning at age 65. The deferred compensation cost, including the Company’s matching contribution, are charged to current operations and credited to a liability account on the consolidated balance sheet.

Stock-based Compensation

The Company accounts for stock-based compensation in accordance with the provisions of FASB ASC 718, Compensation – Stock Compensation. Under the fair value recognition provisions of this statement, stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period. The Company elected the modified prospective method, under which prior periods are not revised for comparative purposes. The valuation provisions apply to new grants and to grants that were outstanding as of the effective date and are subsequently modified. Estimated compensation for the grants that were outstanding as of the effective date will be recognized over the remaining service period using the compensation cost estimated for the pro forma disclosures.

Transfers of Financial Assets

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Income Taxes

Provision for income taxes is based on amounts reported in the statements of income (after exclusion of non-taxable income such as interest on state and municipal securities) and consists of taxes currently due plus deferred taxes on temporary differences in the recognition of income and expense for tax and financial statement purposes. Deferred tax assets and liabilities are included in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.

Deferred income tax liability relating to unrealized appreciation (or the deferred tax asset in the case of unrealized depreciation) on investment securities available for sale is recorded in other liabilities (assets). Such unrealized appreciation or depreciation is recorded as an adjustment to equity in the financial statements and not included in income determination until realized. Accordingly, the resulting deferred income tax liability or asset is also recorded as an adjustment to equity.

The Company classifies interest accrued on unrecognized tax benefits with interest expense. Penalties accrued on unrecognized tax benefits are classified with operating expenses.

 

13


 

Notes to Consolidated Financial Statements

 

 

 

Note 1. Organization and Summary of Significant Accounting Policies, continued

 

Basic Earnings per Common Share

Basic earnings per common share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period, after giving retroactive effect to stock splits and dividends.

Diluted Earnings per Common Share

The computation of diluted earnings per common share is similar to the computation of basic earnings per 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.

Comprehensive Income

Annual comprehensive income reflects the change in the Company’s equity during the year arising from transactions and events other than investments by and distributions to stockholders. It consists of net income plus certain other changes in assets and liabilities that are reported as separate components of stockholders’ equity rather than as income or expense.

Advertising Cost

The Company incurred marketing and advertising cost of $110,025, $132,453 and $123,360 for the years ended December 31, 2009, 2008, and 2007, respectively. The amounts are expensed as incurred and included in the statements of income under other expense.

Off-Balance Sheet Credit Related Financial Instruments

In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under line of credit arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded.

Fair Value of Financial Instruments

FASB ASC 820, Fair Value Measurement and Disclosure, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Certain financial instruments and all nonfinancial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

Reclassification

Certain reclassifications have been made to the prior years’ financial statements to place them on a comparable basis with the current year. Net income and stockholders’ equity previously reported were not affected by these reclassifications.

 

14


 

Notes to Consolidated Financial Statements

 

 

 

Note 1. Organization and Summary of Significant Accounting Policies, continued

 

Recent Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (“FASB”) issued guidance which restructured generally accepted accounting principles (“GAAP”) and simplified access to all authoritative literature by providing a single source of authoritative nongovernmental GAAP. The guidance is presented in a topically organized structure referred to as the FASB Accounting Standards Codification (“ASC”). The new structure is effective for interim or annual periods ending after September 15, 2009. All existing accounting standards have been superseded and all other accounting literature not included is considered non-authoritative.

The FASB issued new accounting guidance on accounting for transfers of financial assets in June 2009. The guidance limits the circumstances in which a financial asset should be derecognized when the transferor has not transferred the entire financial asset by taking into consideration the transferor’s continuing involvement. The standard requires that a transferor recognize and initially measure at fair value all assets obtained (including a transferor’s beneficial interest) and liabilities incurred as a result of a transfer of financial assets accounted for as a sale. The concept of a qualifying special-purpose entity is no longer applicable. The standard is effective for the first annual reporting period that begins after November 15, 2009, for interim periods within the first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. The Company does not expect the guidance to have any impact on the Company’s financial statements. The ASC was amended in December, 2009, to include this guidance.

Guidance was issued in June 2009 requiring a company to analyze whether its interest in a variable interest entity (“VIE”) gives it a controlling financial interest that should be included in consolidated financial statements. A company must assess whether it has an implicit financial responsibility to ensure that the VIE operates as designed when determining whether it has the power to direct the activities of the VIE that significantly impact its economic performance, making it the primary beneficiary. Ongoing reassessments of whether a company is the primary beneficiary are also required by the standard. This guidance amends the criteria to qualify as a primary beneficiary as well as how to determine the existence of a VIE. The standard also eliminates certain exceptions that were previously available. This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited. Comparative disclosures will be required for periods after the effective date. The Company does not expect the guidance to have any impact on the Company’s financial position. An update was issued in December, 2009, to include this guidance in the ASC.

An update was issued in October 2009 to provide guidance requiring companies to allocate revenue in multi-element arrangements. Under this guidance, products or services (deliverables) must be accounted for separately rather than as a combined unit utilizing a selling price hierarchy to determine the selling price of a deliverable. The selling price is based on vendor-specific evidence, third-party evidence or estimated selling price. The amendments in the update are effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 with early adoption permitted. The Company does not expect the update to have an impact on its financial statements.

In October, 2009, updated guidance was issued to provide for accounting and reporting for own-share lending arrangements issued in contemplation of a convertible debt issuance. At the date of issuance, a share-lending arrangement entered into on an entity’s own shares should be measured at fair value in accordance with prior guidance and recognized as an issuance cost, with an offset to additional paid-in capital. Loaned shares are excluded from basic and diluted earnings per share unless default of the share-lending arrangement occurs. The amendment also requires several disclosures including a description and the terms of the arrangement and the reason for entering into the arrangement. The effective dates of the amendment are dependent upon the date the share-lending arrangement was entered into and include retrospective application for arrangements outstanding as of the beginning of fiscal years beginning on or after December 15, 2009. The Company has no plans to issue convertible debt and, therefore, does not expect the update to have an impact on its financial statements.

 

15


 

Notes to Consolidated Financial Statements

 

 

 

Note 1. Organization and Summary of Significant Accounting Policies, continued

 

Recent Accounting Pronouncements, continued

 

In January, 2010, guidance was issued to alleviate diversity in the accounting for distributions to shareholders that allow the shareholder to elect to receive their entire distribution in cash or shares but with a limit on the aggregate amount of cash to be paid. The amendment states that the stock portion of a distribution to shareholders that allows them to elect to receive cash or shares with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance. The amendment is effective for interim and annual periods ending on or after December 15, 2009 and had no impact on the Company’s financial statements.

Also in January, 2010, an amendment was issued to clarify the scope of subsidiaries for consolidation purposes. The amendment provides that the decrease in ownership guidance should apply to (1) a subsidiary or group of assets that is a business or nonprofit activity, (2) a subsidiary that is a business or nonprofit activity that is transferred to an equity method investee or joint venture, and (3) an exchange of a group of assets that constitutes a business or nonprofit activity for a noncontrolling interest in an entity. The guidance does not apply to a decrease in ownership in transactions related to sales of in substance real estate or conveyances of oil and gas mineral rights. The update is effective for the interim or annual reporting periods ending on or after December 15, 2009 and had no impact on the Company’s 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.

Note 2. Restrictions on Cash

To comply with banking regulations, the Company is required to maintain certain average cash reserve balances. The daily average cash reserve requirement was approximately $1,122,000 and $806,000 for the periods including December 31, 2009 and 2008, respectively.

Note 3. Securities

Debt and equity securities have been classified in the balance sheets according to management’s intent. The carrying amounts of securities available for sale and their approximate fair values at December 31, 2009 and 2008 follow:

 

     Amortized
Cost
   Unrealized
Gains
   Unrealized
Losses
   Fair
Value

2009

           

Government-sponsored enterprises

   $ 1,501,913    $ 3,687    $ 145    $ 1,505,455

Mortgage-backed securities

     83,684      2,036      —        85,720

Corporate bonds

     550,000      —        129,250      420,750
                           
   $ 2,135,597    $ 5,723    $ 129,395    $ 2,011,925
                           

2008

           

Government-sponsored enterprises

   $ 1,512,503    $ 21,557    $ —      $ 1,534,060

Mortgage-backed securities

     100,457      197      887      99,767

Corporate bonds

     550,000      —        23,045      526,955
                           
   $ 2,162,960    $ 21,754    $ 23,932    $ 2,160,782
                           

Restricted equity securities were $1,047,514 and $1,047,464 at December 31, 2009 and 2008, respectively. Restricted equity securities primarily consist of investments in stock of the Federal Home Loan Bank of Atlanta (“FHLB”) and Community Bankers Bank (“CBB”). These investments are carried at cost. The FHLB requires financial institutions to make equity investments in the FHLB in order to borrow money. The Company is required to hold that stock so long as it borrows from the FHLB. Redemption of the stock is typically at cost. Upon request, the stock may be sold back to the FHLB, at cost. Due to regulatory restrictions the FHLB is under, such stock redemptions have been indefinitely put on hold. CBB stock is classified as restricted due to the transfer restrictions placed on the ownership of the stock by the issuer.

 

16


 

Notes to Consolidated Financial Statements

 

 

 

Note 3. Securities, continued

 

At December 31, 2009 and 2008, substantially all investment securities were pledged as collateral on public deposits and for other purposes as required or permitted by law.

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 scheduled maturities of securities (all available for sale) at December 31, 2009, were as follows:

 

     Amortized
Cost
   Fair
Value

Due in one year or less

   $ 1,001,913    $ 1,005,600

Due after one year through five years

     500,000      499,855

Due after five years through ten years

     602,504      474,462

Due after ten years

     31,180      32,008
             
   $ 2,135,597    $ 2,011,925
             

For the years ended December 31, 2009, 2008 and 2007, the Company had no realized gains or losses from the sale of investment securities. All were held to their scheduled maturity dates or call date.

The following tables show investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at December 31, 2009 and 2008. These unrealized losses on investment securities are a result of volatility in interest rates and relate to government-sponsored enterprises and corporate bonds issued by other banks at December 31, 2009.

 

     Less Than 12 Months    12 Months or More    Total
     Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses
   Fair
Value
   Unrealized
Losses

2009

                 

Government-sponsored enterprises

   $ 499,855    $ 145    $ —      $ —      $ 499,855    $ 145

Corporate bonds

     —        —        420,750      129,250      420,750      129,250
                                         
   $ 499,855    $ 145    $ 420,750    $ 129,250    $ 920,605    $ 129,395
                                         

2008

                 

Mortgage backed securities

   $ 61,229    $ 861    $ 9,271    $ 26    $ 70,500    $ 887

Corporate bonds

     526,955      23,045      —        —        526,955      23,045
                                         
   $ 588,184    $ 23,906    $ 9,271    $ 26    $ 597,455    $ 23,932
                                         

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

 

17


 

Notes to Consolidated Financial Statements

 

 

 

Note 4. Loans Receivable

The major components of loans in the balance sheets at December 31, 2009 and 2008 are below. The 2008 analysis has been restated to reflect the current classification. Previously, the loan components were classified based on loan purpose instead of the underlying collateral of the loan. The reclassification resulted in the distribution of approximately $65,734,000 in loans previously classified as commercial loans to various real estate categories, primarily nonfarm, nonresidential loans.

 

     2009     2008  

Commercial

   $ 67,428,438      $ 56,391,439   

Real estate:

    

Construction and land development

     8,044,967        10,147,141   

Residential, 1-4 families

     46,355,854        46,638,301   

Residential, 5 or more families

     2,005,142        2,167,181   

Farmland

     2,458,748        2,580,133   

Nonfarm, nonresidential

     51,527,856        49,928,116   

Agricultural

     —          9,958   

Consumer, net of discounts of $15,642 in 2009 and $32,908 in 2008

     7,085,464        7,477,123   

Other

     155,653        79,731   
                
     185,062,122        175,419,123   

Deferred loan origination costs, net of fees

     49,937        26,498   
                
     185,112,059        175,445,621   

Allowance for loan losses

     (4,669,905     (3,365,370
                
   $ 180,442,154      $ 172,080,251   
                

Note 5. Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:

 

     2009     2008     2007  

Balance, beginning

   $ 3,365,370      $ 2,781,565      $ 2,531,305   

Provision charged to expense

     1,604,947        799,913        717,629   

Recoveries of amounts charged off

     115,704        41,110        51,140   

Amounts charged off

     (416,116     (257,218     (518,509
                        

Balance, ending

   $ 4,669,905      $ 3,365,370      $ 2,781,565   
                        

The following is a summary of information pertaining to impaired loans at December 31:

 

     2009    2008

Impaired loans without a valuation allowance

   $ 815,422    $ 443,124

Impaired loans with a valuation allowance

     5,967,693      1,990,260
             

Total impaired loans

   $ 6,783,115    $ 2,433,384
             

Valuation allowance related to impaired loans

   $ 2,132,474    $ 756,492
             

 

18


 

Notes to Consolidated Financial Statements

 

 

 

Note 5. Allowance for Loan Losses, continued

 

The average annual recorded investment in impaired loans and interest income recognized on impaired loans for the years ended December 31, 2009, 2008, and 2007, (all approximate) are summarized below:

 

     2009    2008    2007

Average investment in impaired loans

   $ 4,163,000    $ 1,827,000    $ 665,000
                    

Interest income recognized on impaired loans

   $ 360,600    $ 136,200    $ 138,300
                    

Interest income recognized on a cash basis on impaired loans

   $ 358,200    $ 133,800    $ 136,500
                    

No additional funds are committed to be advanced in connection with impaired loans.

Nonaccrual loans were $983,043 and $544,061 at December 31, 2009 and December 31, 2008, respectively, and are included in the table above. There were $2,825 and $36,725 in loans past due 90 days or more at December 31, 2009 and 2008, respectively, not included in nonaccrual loans.

Note 6. Loan Servicing

The Company occasionally sells the guaranteed portion of certain government guaranteed loans in the secondary market. The Company continues to service these loans that totaled $6,948,992 and $7,733,952 at December 31, 2009 and 2008, respectively. Management believes the value of the servicing asset approximates the fair value of the services the Company must perform related to these loans. Accordingly, no servicing asset or liability is recognized at December 31, 2009 or 2008. Gains on the sale of government guaranteed loans are presented as a separate component of noninterest income on the consolidated statements of income for the years ended December 31, 2009, 2008, and 2007.

Note 7. Property and Equipment

Components of property and equipment and total accumulated depreciation at December 31, 2009 and 2008 are as follows:

 

     2009     2008  

Land and improvements

   $ 1,594,329      $ 1,575,620   

Buildings and improvements

     3,846,297        3,773,371   

Furniture and equipment

     2,455,111        2,406,587   

Construction in progress

     —          24,642   
                
     7,895,737        7,780,220   

Less accumulated depreciation

     (3,013,967     (2,735,694
                
   $ 4,881,770      $ 5,044,526   
                

Depreciation expense amounted to $279,036, $314,241 and $314,933 for the years ended December 31, 2009, 2008, and 2007, respectively.

The Company’s West Pine Street branch is leased under a five-year operating lease at a monthly rental of $1,969. The lease expires March 31, 2010. The Company has the option to renew the lease for three additional five-year terms. Each five-year term will carry a 12.5% increase in the monthly rental over the previous five-year term. Rental expense was $24,398, $42,174 and $41,810 for 2009, 2008 and 2007, respectively.

 

19


 

Notes to Consolidated Financial Statements

 

 

 

Note 7. Property and Equipment, continued

 

Pursuant to the terms of non-cancelable lease agreements in effect at December 31, 2009, and leases expected to renew, pertaining to banking premises and equipment, future minimum rent commitments under various operating leases are as follows:

 

2010

   $ 25,840

2011

     26,578

2012

     26,578

2013

     26,578

2014 and thereafter

     33,223
      
   $ 138,797
      

Note 8. Deposits

The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2009 and 2008, was $40,513,248 and $32,755,026, respectively. At December 31, 2009, the scheduled maturities of total time deposits are as follows:

 

2010

   $ 75,904,057

2011

     22,471,123

2012

     3,344,734

Thereafter

     2,012,626
      
   $ 103,732,540
      

Note 9. Short-Term Debt

Short-term debt consists of Federal Home Loan Bank advances that have original maturities of 12 months or less, federal funds purchased and securities sold under agreements to repurchase, which generally mature within one to four days from the transaction date. Additional information at December 31, 2009, 2008, and 2007, and for the periods then ended is summarized below:

 

     2009     2008     2007  

Outstanding balance at December 31

   $ 3,750,000      $ 3,884,186      $ 147,327   
                        

Year-end weighted average rate

     0.55     1.69     3.20
                        

Daily average outstanding during the year

   $ 3,520,444      $ 701,027      $ 696,780   
                        

Average rate for the year

     0.74     2.60     4.39
                        

Maximum outstanding at any month-end during the year

   $ 6,490,000      $ 4,041,527      $ 1,266,342   
                        

Lines of Credit

The Company has established various credit facilities to provide additional liquidity if and as needed. These include unsecured lines of credit with correspondent banks totaling $19,000,000 and a secured line of credit with the Federal Home Loan Bank of Atlanta of approximately $15,829,000. At December 31, 2009, there were no outstanding amounts due on the unsecured lines with correspondent banks. Amounts due to the Federal Home Loan Bank of Atlanta on the secured line of credit at December 31, 2009 and 2008 amounted to $12,950,000 and $12,200,000, respectively. Of the $12,950,000 outstanding at December 31, 2009, $3,750,000 was classified as short-term debt and $9,200,000 was classified as long-term debt.

 

20


 

Notes to Consolidated Financial Statements

 

 

 

Note 10. Long-Term Debt

The Company’s long-term debt includes instruments bearing fixed rates ranging from 3.02% to 4.99% and convertible rate instruments bearing rates ranging from 3.71% to 4.95%. The weighted average rate of all long-term debt at December 31, 2009 and December 31, 2008 was 4.21% and 4.30%, respectively. Collateral consist of real estate, substantially all 1-4 family first and second lien and revolving residential real estate loans and certain investment securities. The contractual maturities of long-term debt at December 31, 2009 and 2008 are as follows:

 

     2009    2008

2009

   $ n/a    $ 3,000,000

2010

     2,250,000      2,250,000

2011

     1,350,000      1,350,000

2012

     350,000      350,000

2013

     —        —  

2014

     1,500,000      1,500,000

Thereafter

     3,750,000      2,250,000
             
   $ 9,200,000    $ 10,700,000
             

Note 11. 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 FASB ASC 820, 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.

 

21


 

Notes to Consolidated Financial Statements

 

 

 

Note 11. Fair Value, continued

 

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 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 December 31, 2009, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. 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.

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)

December 31, 2009

   Total    Level 1    Level 2    Level 3

Investment securities available for sale

   $ 2,012    $ —      $ 2,012    $ —  
                           

Total assets at fair value

   $ 2,012    $ —      $ 2,012    $ —  
                           

Total liabilities at fair value

   $ —      $ —      $ —      $ —  
                           

(in thousands)

December 31, 2008

   Total    Level 1    Level 2    Level 3

Investment securities available for sale

   $ 2,161    $ —      $ 2,161    $ —  
                           

Total assets at fair value

   $ 2,161    $ —      $ 2,161    $ —  
                           

Total liabilities at fair value

   $ —      $ —      $ —      $ —  
                           

 

22


 

Notes to Consolidated Financial Statements

 

 

 

Note 11. Fair Value, continued

 

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 required to be 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)

December 31, 2009

   Total    Level 1    Level 2    Level 3

Impaired Loans

   $ 3,835    $ —      $ 3,835    $ —  

Foreclosed assets

     53      —        53      —  
                           

Total assets at fair value

   $ 3,888    $ —      $ 3,888    $ —  
                           

Total liabilities at fair value

   $ —      $ —      $ —      $ —  
                           

(in thousands)

December 31, 2008

   Total    Level 1    Level 2    Level 3

Impaired Loans

   $ 1,234    $ —      $ 1,234    $ —  

Foreclosed assets

     50      —        50      —  
                           

Total assets at fair value

   $ 1,284    $ —      $ 1,284    $ —  
                           

Total liabilities at fair value

   $ —      $ —      $ —      $ —  
                           

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.

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. The carrying amount of accrued interest receivable approximates its fair value.

 

23


 

Notes to Consolidated Financial Statements

 

 

 

Note 11. Fair Value, continued

 

Financial Instruments, continued

 

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. The carrying amount of accrued interest payable approximates fair value.

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 approximates fair value.

Fair Values

The estimated fair values of the Company’s financial instruments are as follows (dollars in thousands):

 

     December 31, 2009    December 31, 2008
     Carrying
Amount
   Fair
Value
   Carrying
Amount
   Fair
Value

Financial assets

           

Cash and due from banks

   $ 1,924    $ 1,924    $ 1,294    $ 1,294

Federal funds sold and interest-bearing deposits with banks

     19,480      19,480      16,703      16,703

Securities, available for sale

     2,012      2,012      2,161      2,161

Restricted equity securities

     1,048      1,048      1,047      1,047

Loans, net of allowance for loan losses

     180,442      180,354      172,080      181,549

Bank owned life insurance

     3,173      3,173      3,062      3,062

Financial liabilities

           

Deposits

     173,975      163,638      163,747      160,442

Federal funds purchased and securities sold under agreements to repurchase

     —        —        2,144      2,146

Long-term and short-term debt

     12,950      12,953      12,440      12,701

Commitments and contingencies

     —        —        —        —  

 

24


 

Notes to Consolidated Financial Statements

 

 

 

Note 12. Stockholders’ Equity

On January 9, 2009, the Company issued and sold to the US Department of the Treasury 2,000 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series B, with a liquidation preference of $1,000 per share and a warrant to purchase 100.001 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series C, with a liquidation preference of $1,000 per share, at an initial exercise price of $0.01 per share. The Warrant was immediately exercised. The Series B Preferred Stock pays cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter. The Series C Warrant Preferred Stock pays a cumulative dividend of 9%, per annum. Net proceeds from the issuance, after legal fees, amounted to $1,975,015. Net accretion of discounts over amortization of premiums on the Series B and C Preferred Stock amounted to $31,490 for the year ended December 31, 2009, bringing the total Series B and C Preferred Stock investment to $2,006,505. Dividends accrued on the Series B and C Preferred Stock at December 31, 2009 totaled $14,533, which is included in dividends payable with accrued dividends on the Series A Preferred Stock.

In 2007, the Company adopted the requirements of the Compensation Topic of FASB ASC 715-60 regarding split dollar life insurance arrangements as a change in accounting principles through a cumulative-effect adjustment to beginning retained earnings. Entities purchase life insurance for various reasons including protection against loss of key employees and to fund postretirement benefits. The two most common types of life insurance arrangements are endorsement split dollar life, which the Company owns, and collateral assignment split dollar life. The FASB ASC states that entities with endorsement split-dollar life insurance arrangements that provide a benefit to an employee that extends to postretirement periods should recognize a liability for future benefits. The reduction of beginning retained earnings resulting from the cumulative-effect of the adoption was $43,346. Split dollar benefit expense amounting to approximately $16,514 and $14,785 was recognized in salaries and benefits expense in the period ended December 31, 2009 and 2008, respectively.

Note 13. Earnings Per Share

The following table details the computation of basic and diluted earnings per share for the years ended December 31, 2009, 2008, and 2007.

 

     2009     2008     2007  

Net income

   $ 2,232,294      $ 1,514,565      $ 2,785,206   

Non convertible preferred stock dividends (Series B and C)

     (138,674     —          —     
                        

Net income before convertible preferred dividends

     2,093,620        1,514,565        2,785,206   

Convertible preferred stock dividends (Series A)

     (119,294     (119,295     (119,295
                        

Net income available to common shareholders

   $ 1,974,326      $ 1,395,270      $ 2,665,911   
                        

Weighted average common shares outstanding

     3,192,566        3,165,891        3,126,834   

Effect of dilutive securities:

      

Options

     6,464        25,888        42,290   

Convertible preferred stock

     395,148        395,148        395,148   
                        

Weighted average common shares outstanding, diluted

     3,594,178        3,586,927        3,564,272   
                        

Basic earnings per share

   $ 0.62      $ 0.44      $ 0.85   
                        

Diluted earnings per share

   $ 0.58      $ 0.42      $ 0.78   
                        

 

25


 

Notes to Consolidated Financial Statements

 

 

 

Note 14. Employee Benefit Plans

The Company has a defined contribution plan (the Plan) qualifying under IRS Code Section 401(k). Eligible participants in the Plan can contribute up to the maximum percentage allowable not to exceed the dollar limit under IRC Section 401(k). Employee contributions were matched by the Company based on 100% of the first four percent of an employee’s contribution before 2008. Beginning in 2008, the Company began matching 100% of the first six percent of an employee’s contribution. For the years ended December 31, 2009, 2008 and 2007, the Company contributed $128,586, $136,496 and $89,420 to the Plan, respectively.

The Company has a Supplemental Retirement Benefit Plan (SERP) to provide future compensation to certain members of management upon retirement. Under plan provisions, payments projected to range from $19,838 to $89,914, per year, are payable for the life of the executive, generally beginning at age 65. The liability accrued for the compensation under the plan was $398,767 and $336,388 at December 31, 2009 and 2008, respectively. Employee benefits expense, an actuarially determined amount, was $62,379, $92,009, and $94,610 for the years ended December 31, 2009, 2008, and 2007, respectively. The assumed discount rate for the plan was 7.0% at December 31, 2009, 2008 and 2007.

The Company also has a deferred compensation plan under which directors may elect to defer their directors’ fees. Participating directors receive an additional 30% matching contribution and will be paid an annual benefit for a specified number of years after retirement, generally beginning at age 65. The maximum payout period is ten years. The liability accrued for deferred directors’ fees was $517,400 and $398,090 at December 31, 2009 and 2008, respectively. Deferred directors’ fees expensed under the plan for the years ended December 31, 2009, 2008 and 2007 were $119,310, $97,749, and $164,550, respectively.

The Company has purchased and is the primary beneficiary of life insurance policies indirectly related to the Supplemental Retirement Benefit Plan and the directors’ deferred compensation liability. The cash value of the life insurance policies totaled $3,173,307 and $3,062,150 at December 31, 2009 and 2008, respectively.

Note 15. Stock Based Compensation

The Company has two share-based compensation plans, which are described below. The compensation cost that has been charged against income for those plans was approximately $45,507, $51,791 and $7,801 for the years ended December 31, 2009, 2008 and 2007, respectively. The income tax benefit recognized for share-based compensation arrangements was approximately $15,472, $17,609 and $2,652 for the years ended December 31, 2009, 2008 and 2007, respectively.

The Company has a qualified incentive stock option plan which reserved shares for purchase by eligible employees. Options granted under this plan vest at the rate of 20% per year, expire not more than ten years from the date of grant, and are exercisable at not less than the fair market value of the stock at the date of the grant. This plan expired on June 1, 2007. Before the plan expired, the 43,296 remaining shares available for grant were granted.

The Company also has a non-qualified stock option plan which reserved shares for purchase by non-employee directors. Options granted under this plan are exercisable after six months from the date of the grant at not less than the fair market value of the stock at the date of the grant. The life of such options shall not extend more than ten years from the date of the grant. This plan also expired on June 1, 2007. The six remaining shares not granted as of that date expired.

 

26


 

Notes to Consolidated Financial Statements

 

 

 

Note 15. Stock Based Compensation, continued

 

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. The risk-free interest rate is based on the U.S. Treasury rate for the expected life at the time of grant. Volatility is based on the volatilities of our trading history. The expected life is based on the average life of the options of 10 years and the weighted average graded vesting period of 5 years, and forfeitures are considered immaterial based on the historical data of the Company. The following table illustrates the assumptions for the Black-Scholes model used in determining the fair value of options granted to employees for the year ended December 31, 2007. No options were granted subsequent to 2007 due to the expiration of the plan.

 

     Year Ended
December 31,
2007
 

Dividend yield

   0.00

Risk-free rate

   4.87

Volatility

   21.59

Expected life

   10 years   

A summary of option activity under the stock option plans during the years ended December 31, 2009, 2008 and 2007 is presented below:

 

     Options
Available
    Options
Outstanding
    Weighted
Average
Exercise
Price

Balance at December 31, 2006

   43,302      252,188      2.74

Exercised

   —        (179,088   2.49

Authorized

   —        —        —  

Forfeited

   —        —        —  

Granted

   (43,296   43,296      13.27

Expired

   (6   —        —  
              

Balance at December 31, 2007

   —        116,396      7.07

Exercised

   —        (4,804   3.77

Authorized

   —        —        —  

Forfeited

   —        —        —  

Granted

   —        —        —  

Expired

   —        —        —  
              

Balance at December 31, 2008

   —        111,592      7.21

Exercised

   —        (30,537   2.82

Authorized

   —        —        —  

Forfeited

   —        —        —  

Granted

   —        —        —  

Expired

   —        —        —  
              

Balance at December 31, 2009

   —        81,055      8.86
              

 

27


 

Notes to Consolidated Financial Statements

 

 

 

Note 15. Stock Based Compensation, continued

 

The following table sets forth the exercise prices, the number of options outstanding and the number of options exercisable at December 31, 2009:

 

Exercise Price    Number of Options
Outstanding
   Weighted Average
Exercise Price
   Weighted Average
Contractual Life
Remaining (Years)
   Number of Options
Exercisable
   Weighted Average
Exercise Price
$ 3.95    13,306    $ 3.95    1.1    13,306    $ 3.95
  2.57    15,162      2.57    1.6    15,162      2.57
  5.30    5,691      5.30    3.5    5,691      5.30
  6.15    3,600      6.15    4.3    3,600      6.15
  13.27    43,296      13.27    7.4    17,318      13.27
                  
  Total/Average    81,055      8.86    4.9    55,077      6.78
                  

The following table sets forth information pertaining to the Company’s exercisable options and options expected to vest, as of December 31, 2009:

 

Incentive and non-qualified stock options:

  

Fair value of options granted during period expected to vest

   $ —  
      

Aggregate intrinsic value of exercisable and nonvested options expected to vest

   $ —  
      

Number of nonvested options expected to vest

     25,978
      

Weighted average price of nonvested options expected to vest

   $ 13.27
      

Weighted average remaining life of nonvested options expected to vest

     2.40
      

Intrinsic value of nonvested options expected to vest

   $ —  
      

As of December 31, 2009, there was $87,096 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Company’s stock option plans. That cost is expected to be recognized over a weighted-average period of 2.11 years. The total fair value of shares vested during the year ended December 31, 2009 was $73,719.

Note 16. Income Taxes

Current and Deferred Income Tax Components

The components of income tax expense are as follows:

 

     2009     2008     2007  

Current

   $ 1,270,731      $ 1,052,724      $ 1,766,921   

Deferred

     (559,407     (228,008     (198,034
                        
   $ 711,324      $ 824,716      $ 1,568,887   
                        

Rate Reconciliation

A reconciliation of expected income tax expense computed at the statutory federal income tax rate to income tax expense included in the statements of income is as follows:

 

     2009     2008     2007  

Expected tax expense

   $ 1,000,830      $ 795,356      $ 1,480,392   

State income tax, net of federal tax benefit

     80,105        78,091        138,285   

Tax exempt income

     (402,674     (66,312     (54,956

Other

     33,063        17,581        5,166   
                        
   $ 711,324      $ 824,716      $ 1,568,887   
                        

 

28


 

Notes to Consolidated Financial Statements

 

 

 

Note 16. Income Taxes, continued

 

Deferred Income Tax Analysis

The significant components of net deferred tax assets at December 31, 2009 and 2008 are included in other assets and are summarized as follows:

 

     2009    2008

Deferred tax assets

     

Allowance for loan losses

   $ 1,728,221    $ 1,229,730

Deferred compensation liability

     353,182      283,141

Net unrealized loss on securities available for sale

     46,836      2,777

Interest income on non-accrual loans

     18,698      13,347

Lower of cost or market adjustment on loans transferred from available for sale to portfolio

     38,969      43,717
             
     2,185,906      1,572,712
             

Deferred tax liabilities

     

Depreciation

     290,705      295,413

Net deferred loan fees

     19,250      10,215

Other

     17,105      14,481
             
     327,060      320,109
             

Net deferred tax asset

   $ 1,858,846    $ 1,252,603
             

The Company files tax returns in the United States Federal jurisdiction and the states of North Carolina and Virginia.

The Company classifies interest and penalties related to income tax assessments, if any, in interest expense or non-interest expense, respectively in the consolidated statements of operations. Tax years 2006 through 2008 are subject to examination by the Internal Revenue Service, North Carolina Department of Revenue, and the Virginia Department of Taxation. The Company has analyzed the tax positions taken or expected to be taken in its tax returns and has concluded it has no liability related to uncertain tax positions.

Note 17. Commitments and Contingencies

Litigation

In the normal course of business the Company is involved in various legal proceedings. After consultation with legal counsel, management believes that any liability resulting from such proceedings will not be material to the financial statements.

Financial Instruments with Off-Balance-Sheet Risk

The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, credit risk in excess of the amount recognized in the balance sheets.

 

29


 

Notes to Consolidated Financial Statements

 

 

 

Note 17. Commitments and Contingencies, continued

 

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as for on-balance-sheet instruments. A summary of the Company’s commitments at December 31, 2009 and 2008 is as follows:

 

     2009    2008

Commitments to extend credit, including unused lines of credit

   $ 34,920,362    $ 36,421,508

Standby letters of credit

     1,602,956      2,036,638
             
   $ 36,523,318    $ 38,458,146
             

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory, property and equipment, residential real estate and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Company deems necessary. The commitments carry both fixed and variable rates of interest.

Concentrations of Credit Risk

Substantially all of the Company’s loans, commitments to extend credit, and standby letters of credit have been granted to customers in the Company’s market area and such customers are generally depositors of the Company. The concentrations of credit by type of loan are set forth in Note 4. The distribution of commitments to extend credit approximates the distribution of loans outstanding. The Company, as a matter of policy, does not extend credit to any single borrower or group of related borrowers in excess of approximately $4,600,000 unless guaranteed by SBA or USDA Rural Development Corporation. Although the Company has a reasonably diversified loan portfolio, the following industries are considered concentrations: real estate, motion picture and sound recording, truck transportation, fabricated metal product manufacturing, heavy and civil engineering construction and building construction.

Other Commitments

The Company has entered into employment agreements with certain of its key officers covering duties, salary, benefits, provisions for termination and Company obligations in the event of merger or acquisition.

Note 18. Regulatory Restrictions

Dividends

The Company’s principal source of funds for dividend payments is dividends received from the Bank. The Bank, as a North Carolina banking corporation, may pay cash dividends only out of undivided profits as determined pursuant to North Carolina banking laws. However, regulatory authorities may limit payment of dividends by a bank when it is determined that such a limitation is in the public interest and is necessary to ensure financial soundness of the Bank.

 

30


 

Notes to Consolidated Financial Statements

 

 

 

Note 18. Regulatory Restrictions, continued

 

Intercompany Transactions

The Bank’s legal lending limit on loans to the Company are governed by Federal Reserve Act 23A, and differ from legal lending limits on loans to external customers. Generally, a bank may lend up to 10% of its capital and surplus to its Parent, if the loan is secured. If collateral is in the form of stocks, bonds, debentures or similar obligations, it must have a market value when the loan is made of at least 20% more than the amount of the loan, and if obligations of a state or political subdivision or agency thereof, it must have a market value of at least 10% more than the amount of the loan. If such loans are secured by obligations of the United States or agencies thereof, or by notes, drafts, bills of exchange or bankers’ acceptances eligible for rediscount or purchase by a Federal Reserve Bank, requirements for collateral in excess of the loan amount do not apply. Under this definition, the legal lending limit for the Bank on loans to the Company was approximately $2,695,000 at December 31, 2009. No 23A transactions were deemed to exist between the Company and the Bank at December 31, 2009 and 2008.

Capital Requirements

The Company and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory (and possibly additional discretionary) actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets, as all those terms are defined in the regulations. Management believes, as of December 31, 2009, that the Bank meets all capital adequacy requirements to which it is subject.

As of December 31, 2009, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. There are no conditions or events after that notification that management believes to have changed the institution’s category.

 

31


 

Notes to Consolidated Financial Statements

 

 

 

Note 18. Regulatory Restrictions, continued

 

The Company’s and Bank’s actual capital amounts and minimum required amounts (dollars in thousands) and ratios are also presented in the following table.

 

     Actual     Minimum
Required

For Capital
Adequacy Purposes
    Minimum To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
 
     Amount    Ratio     Amount    Ratio     Amount    Ratio  

December 31, 2009

               

Total Capital (to Risk-Weighted Assets)

               

Consolidated

   $ 28,662    17.00   $ 13,491    8.00   $ n/a    n/a

Surrey Bank & Trust

   $ 27,191    16.12   $ 13,490    8.00   $ 16,863    10.00

Tier I Capital (to Risk-Weighted Assets)

               

Consolidated

   $ 26,523    15.73   $ 6,745    4.00   $ n/a    n/a

Surrey Bank & Trust

   $ 25,052    14.86   $ 6,745    4.00   $ 10,118    6.00

Tier I Capital (to Average Assets)

               

Consolidated

   $ 26,523    12.50   $ 8,489    4.00   $ n/a    n/a

Surrey Bank & Trust

   $ 25,052    11.80   $ 8,495    4.00   $ 10,619    5.00

December 31, 2008

               

Total Capital (to Risk-Weighted Assets)

               

Consolidated

   $ 25,160    14.75   $ 13,649    8.00   $ n/a    n/a

Surrey Bank & Trust

   $ 23,548    13.80   $ 13,648    8.00   $ 17,060    10.00

Tier I Capital (to Risk-Weighted Assets)

               

Consolidated

   $ 23,012    13.49   $ 6,824    4.00   $ n/a    n/a

Surrey Bank & Trust

   $ 21,400    12.54   $ 6,824    4.00   $ 10,236    6.00

Tier I Capital (to Average Assets)

               

Consolidated

   $ 23,012    11.38   $ 8,089    4.00   $ n/a    n/a

Surrey Bank & Trust

   $ 21,400    10.58   $ 8,090    4.00   $ 10,113    5.00

Note 19. Transactions with Related Parties

The Company has entered into transactions with its directors, significant shareholders and their affiliates (related parties). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features.

Aggregate loan transactions with related parties were as follows:

 

     2009     2008  

Balance, beginning

   $ 7,012,795      $ 6,196,064   

New loans

     2,837,249        2,869,538   

Repayments

     (2,327,032     (2,052,807
                

Balance, ending

   $ 7,523,012      $ 7,012,795   
                

Deposit transactions with related parties at December 31, 2009 and 2008 were insignificant.

 

32


 

Notes to Consolidated Financial Statements

 

 

 

Note 20. Investment in Freedom Finance, LLC

The condensed balance sheets of Freedom Finance, LLC, as of December 31, 2009 and 2008, and the related condensed statements of income and cash flows for each of the three years in the period ended December 31, 2009, are presented below:

Condensed Balance Sheets

December 31, 2009 and 2008

 

     2009    2008

Assets

     

Cash and due from banks

   $ 25,234    $ 33,398

Interest-bearing deposits with banks

     1,375,858      —  

Loans, net of allowance for loan losses of $106,331 and $178,687 in 2009 and 2008, respectively

     956,980      1,608,187

Property and equipment, net

     1,320      2,907

Foreclosed assets

     9,010      22,206

Other assets

     102,499      104,392
             
   $ 2,470,901    $ 1,771,090
             

Liabilities and Capital

     

Liabilities

     

Short-term debt

   $ —      $ 240,000

Other liabilities

     —        7,665
             
     —        247,665
             

Capital

     

Equity

     642,078      642,078

Retained earnings

     1,828,823      881,347
             
     2,470,901      1,523,425
             
   $ 2,470,901    $ 1,771,090
             

Condensed Statements of Income

For the years ended December 31, 2009, 2008, and 2007

 

     2009    2008    2007  

Income

        

Interest income

   $ 299,964    $ 476,304    $ 680,633   

Life insurance proceeds

     1,000,000      —        —     

Other income

     915      2,083      4,502   
                      

Total income

     1,300,879      478,387      685,135   
                      

Expenses

        

Interest expense

     796      35,767      124,143   

Provision for loan losses

     103,119      22,871      284,901   

Salaries and employee benefits

     119,134      127,306      121,351   

Occupancy expense

     14,321      14,915      13,381   

Equipment expense

     5,839      8,131      6,715   

Foreclosed assets, net

     55,354      43,260      37,695   

Other expense

     54,840      180,054      158,611   
                      

Total expense

     353,403      432,304      746,797   
                      

Net income (loss)

   $ 947,476    $ 46,083    $ (61,662
                      

 

33


 

Notes to Consolidated Financial Statements

 

 

 

Note 20. Investment in Freedom Finance, LLC, continued

 

Condensed Statements of Cash Flows

For the years ended December 31, 2009, 2008, and 2007

 

     2009     2008     2007  

Cash flows from operating activities

      

Net income (loss)

   $ 947,476      $ 46,083      $ (61,662

Adjustments to reconcile net income to net cash provided by operating activities

      

Depreciation

     1,587        2,410        2,605   

Provision for loan losses

     103,119        22,871        284,901   

Deferred income taxes

     27,642        30,569        40,396   

Net (increase) decrease in other assets

     (12,553     134,662        (43,579

Net increase (decrease) in other liabilities

     (7,665     9,401        (23,566
                        

Net cash provided by operating activities

     1,059,606        245,996        199,095   
                        

Cash flows from investing activities

      

Net increase in interest-bearing deposits with banks

     (1,375,858     —          —     

Net decrease in loans

     548,088        699,181        299,083   
                        

Net cash provided by (used in) investing activities

     (827,770     699,181        299,083   
                        

Cash flows from financing activities

      

Net increase (decrease) increase in short-term debt

     (240,000     240,000        —     

Net decrease in long-term debt

     —          (1,200,000     (500,000
                        

Net cash used in financing activities

     (240,000     (960,000     (500,000
                        

Net decrease in cash and due from banks

     (8,164     (14,823     (1,822

Cash and due from banks, beginning

     33,398        48,221        50,043   
                        

Cash and due from banks, ending

   $ 25,234      $ 33,398      $ 48,221   
                        

 

34


 

Notes to Consolidated Financial Statements

 

 

 

Note 21. Segment Reporting

The Company has two reportable segments, the Bank and Freedom Finance, LLC (subsidiary). The Bank provides mortgage, consumer, and commercial loans. Freedom Finance, LLC specializes in the purchase of sales finance contracts from local automobile dealers. Information about reportable segments, and reconciliation of such information to the consolidated financial statements as of and for the years ended December 31, 2009, 2008 and 2007, is as follows:

 

     Bank    Freedom
Finance, LLC
    Intersegment
Elimination
    Consolidated
Totals

2009

         

Net interest income

   $ 7,321,731    $ 299,168      $ —        $ 7,620,899

Noninterest income

     2,510,496      1,000,915        —          3,511,411

Depreciation and amortization

     277,449      1,587        —          279,036

Provision for loan losses

     1,501,828      103,119        —          1,604,947

Net income

     1,284,818      947,476        —          2,232,294

Assets

     218,349,924      2,470,901        (3,871,043     216,949,782

2008

         

Net interest income

   $ 6,479,931    $ 440,538      $ —        $ 6,920,469

Noninterest income

     2,496,028      2,083        —          2,498,111

Depreciation and amortization

     311,831      2,410        —          314,241

Provision for loan losses

     777,042      22,871        —          799,913

Net income

     1,468,482      46,083        —          1,514,565

Assets

     203,970,462      1,771,090        (1,563,537     204,178,015

2007

         

Net interest income

   $ 8,017,269    $ 556,490      $ —        $ 8,573,759

Noninterest income

     2,613,431      4,502        —          2,617,933

Depreciation and amortization

     312,328      2,605        —          314,933

Provision for loan losses

     432,728      284,901        —          717,629

Net income

     2,846,868      (61,662     —          2,785,206

Assets

     209,806,380      2,675,606        (1,524,613     210,957,373

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately because each segment appeals to different markets and, accordingly, require different technology and marketing strategies.

The Bank derives a majority of its revenue from interest income and relies primarily on net interest income to assess the performance of the segments and make decisions about resources to be allocated to the segment. Therefore, the segments are reported using net interest income for the period ended December 31, 2009, 2008, and 2007. The Bank does allocate income taxes to the segments. Other revenue represents noninterest income which is also allocated to the segments. The Company includes the holding company and an insurance and investment agency in its Bank segment above. The Bank does not have any single external customer from which it derives 10 percent or more of its revenues and operates in one geographical area.

 

35


 

Notes to Consolidated Financial Statements

 

 

 

Note 22. Parent Company Activity

Surrey Bancorp owns all of the outstanding shares of the Bank. Condensed financial statements of Surrey Bancorp follow:

Condensed Balance Sheets

December 31, 2009 and 2008

 

     2009     2008  

Assets

    

Cash and due from banks

   $ 37,673      $ 101,253   

Interest-bearing deposits with banks

     1,480,000        1,540,000   

Investment in subsidiaries

     26,954,502        22,771,139   

Other assets

     —          598   
                
   $ 28,472,175      $ 24,412,990   
                

Liabilities and Capital

    

Liabilities

    

Dividends payable

   $ 44,603      $ 29,987   

Other liabilities

     2,220        —     
                
     46,823        29,987   
                

Capital

    

Preferred stock

     4,626,830        2,620,325   

Common stock

     9,406,429        9,270,253   

Retained earnings

     14,468,089        12,493,763   

Accumulated other comprehensive income (loss)

     (75,996     (1,338
                
     28,425,352        24,383,003   
                
   $ 28,472,175      $ 24,412,990   
                

Condensed Statements of Income

For the periods ended December 31, 2009, 2008, and 2007

 

     2009     2008     2007  

Income

      

Equity in undistributed income of subsidiary

   $ 2,227,986      $ 1,514,842      $ 2,765,315   

Interest income

     38,874        59,172        81,376   
                        

Total income

     2,266,860        1,574,014        2,846,691   
                        

Expenses

      

Other expense

     32,346        59,592        51,239   
                        

Total expense

     32,346        59,592        51,239   
                        

Income before income taxes

     2,234,514        1,514,422        2,795,452   

Income tax expense (benefit)

     2,220        (143     10,246   
                        

Net income

     2,232,294        1,514,565        2,785,206   

Preferred stock dividends

     (257,968     (119,295     (119,295
                        

Net income available to common stockholders

   $ 1,974,326      $ 1,395,270      $ 2,665,911   
                        

 

36


 

Notes to Consolidated Financial Statements

 

 

 

Note 22. Parent Company Activity, continued

 

Condensed Statements of Cash Flows

For the periods ended December 31, 2009, 2008, and 2007

 

     2009     2008     2007  

Cash flows from operating activities

      

Net income

   $ 2,232,294      $ 1,514,565      $ 2,785,206   

Adjustments to reconcile net income to net cash provided by operating activities

      

Equity in undistributed earnings of subsidiary

     (2,227,986     (1,514,842     (2,765,315

Net decrease (increase) in other assets

     598        554,232        (458,964

Net increase in other liabilities

     2,220        —          —     
                        

Net cash provided (used) by operating activities

     7,126        553,955        (439,073
                        

Cash flows from investing activities

      

Net (increase) decrease in interest-bearing deposits with banks

     60,000        (475,000     325,000   

Increase in investment in subsidiary

     (2,000,000     —          —     
                        

Net cash used in investing activities

     (1,940,000     (475,000     325,000   
                        

Cash flows from financing activities

      

Common stock options exercised

     86,238        18,132        186,467   

Issuance of preferred stock, net

     1,975,015        —          —     

Tax benefit of non-employee stock option deduction

     19,903        —          565,076   

Dividends paid

     (211,862     (593,791     (119,295
                        

Net cash provided by financing activities

     1,869,294        (575,659     632,248   
                        

Net increase (decrease) in cash and due from banks

     (63,580     (496,704     518,175   

Cash and due from banks, beginning

     101,253        597,957        79,782   
                        

Cash and due from banks, ending

   $ 37,673      $ 101,253      $ 597,957   
                        

Note 23. Subsequent Events

The Company has evaluated events and transactions subsequent to the date of these financial statements for potential recognition and disclosure.

 

37


LOGO

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders

Surrey Bancorp

Mount Airy, North Carolina

We have audited the consolidated balance sheets of Surrey Bancorp and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Surrey Bancorp and subsidiaries as of December 31, 2009 and 2008 and the results of its operations and its cash flows for each of the three years then ended, in conformity with U.S. generally accepted accounting principles.

 

LOGO
Galax, Virginia
March 26, 2010

LOGO

 

38


 

Management’s Discussion and Analysis

 

 

General

Surrey Bancorp was formed on May 1, 2003, and was created for the purpose of acquiring all the outstanding shares of common stock of Surrey Bank & Trust.

Surrey Bank & Trust was incorporated on July 15, 1996, as a North Carolina banking corporation and opened for business on July 22, 1996. The Bank operates for the primary purpose of serving the banking needs of individuals and small to medium sized businesses in Surry County, NC and Patrick County, VA and the surrounding area, while developing personal, hometown associations with these customers. The Bank offers a wide range of banking services including checking and savings accounts; commercial, consumer and mortgage loans; safe deposit boxes; and other associated services. Through its subsidiaries, Surrey Investment Services, Inc. and Freedom Finance, LLC, the Bank offers insurance and investment products and sales finance services, respectively. The Bank’s primary sources of revenue are interest income from its commercial and real estate lending activities and, to a lesser extent, from its investment portfolio. The Bank also earns fees from lending and deposit activities. The major expenses of the Bank are interest on deposit accounts and general and administrative expenses, such as salaries, occupancy and related expenses.

Primary Market Area

The Bank’s market area consists of an area extending from Surry County, with offices in Mount Airy and Pilot Mountain, North Carolina, north into the southern portions of Carroll and Patrick Counties, Virginia. Mount Airy is the industrial and trading center of Surry County with a population of approximately 8,500 people living in the city limits and 30,000 in the metropolitan area. The total population of Surry County is approximately 73,000 people. Mount Airy is served by Interstate Highways 77 and 74 and U.S. Highways 52 and 601. Surry County has a civilian labor force of over 35,000. Major industries include manufacturing, construction, fabricated metals, and lumber and wood. The Bank has a branch office in Stuart, Virginia, which is located in Patrick County, Virginia. The primary industries found in Patrick County are lumber and wood, textiles and agricultural.

Management’s Discussion and Analysis of Operations

Management’s Discussion and Analysis is provided to assist in the understanding and evaluation of the Company’s financial condition and its results of operations. The following discussion should be read in conjunction with the Company’s financial statements and related notes.

Critical Accounting Policies

Surrey Bancorp’s financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The notes to the audited consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2009, contain a summary of its significant accounting policies. Management believes the Company’s policies with respect to the methodology for the determination of the allowance for loan losses, and asset impairment judgments, such as the recoverability of intangible assets, involve a higher degree of complexity and require management to make difficult and subjective judgments that often require assumptions or estimates about highly uncertain matters. Accordingly, management considers the policies related to those areas as critical.

The allowance for loan losses is an estimate of the losses that may be sustained in the loan portfolio. The allowance is based on two basic principles of accounting: (i) Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimable, and (ii) Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market, and the Bank’s investment in the loan.

 

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Management’s Discussion and Analysis

 

 

Critical Accounting Policies, continued

The allowance for loan losses has three basic components: (i) the formula allowance, (ii) the specific allowance, and (iii) the unallocated allowance. Each of these components is determined based upon estimates that can and do change when the actual events occur. The formula allowance uses a historical loss view as an indicator of future losses and, as a result, could differ from the loss incurred in the future. However, since this history is updated with the most recent loss information, the errors that might otherwise occur are mitigated. The specific allowance uses various techniques to arrive at an estimate of loss. Historical loss information, expected cash flows and fair market value of collateral are used to estimate these losses. The use of these values is inherently subjective and our actual losses could be greater or less that the estimates. The unallocated allowance captures losses that are attributable to various economic environmental factors, industry or geographic sectors whose impact on the portfolio have occurred but have yet to be recognized in either the formula or specific allowance.

Table 1. Net Interest Income and Average Balances (dollars in thousands)

Net interest income is the Company’s principal source of earnings. Net interest income is the amount of income generated by earning assets (primarily loans and investment securities) less the interest expense incurred on interest-bearing liabilities (primarily deposits and FHLB Advances used to fund earning assets). Changes in the volume and mix of earning assets and interest-bearing liabilities, as well as their respective yields and rates, have a significant impact on the level of net interest income. Changes in the interest rate environment and the Company’s cost of funds also affect net interest income. Table 1 summarizes the major components of net interest income for the years ended December 31, 2009 and 2008 and 2007.

 

     Periods Ended December 31,  
     2009     2008     2007  
     Average
Balance
    Interest
Income/
Expense
   Yield/
Cost
    Average
Balance
    Interest
Income/
Expense
   Yield/
Cost
    Average
Balance
    Interest
Income/
Expense
   Yield/
Cost
 

Interest-earning assets

                     

Deposits in other banks

   $ 17,406      $ 21    0.12   $ 18,129      $ 298    1.65   $ 23,268      $ 994    4.27

Taxable investment securities

     3,285        68    2.08     3,582        139    3.86     4,152        213    5.13

Federal funds sold

     323        1    0.17     357        7    2.00     408        20    4.99

Loans 1 2

     177,919        10,757    6.05     171,799        11,912    6.93     160,289        13,797    8.61
                                                               

Total interest-earning assets

     198,933        10,847        193,867        12,356        188,117        15,024   
                                                   

Yield on average interest-earning assets

        5.45        6.37        7.99
                                 

Noninterest-earning assets

                     

Cash and due from banks

     3,487             1,503             1,564        

Property and equipment

     4,964             5,104             4,622        

Foreclosed assets

     73             46             112        

Interest receivable and other

     6,046             5,905             5,722        

Allowance for loan losses

     (3,951          (2,959          (2,568     
                                       

Total noninterest-earning assets

     10,619             9,599             9,452        
                                       

Total assets

   $ 209,552           $ 203,466           $ 197,569        
                                       

Interest-bearing liabilities

                     

Demand deposits

   $ 20,238        130    0.65   $ 18,934      $ 296    1.56   $ 17,825      $ 490    2.75

Savings deposits

     21,459        208    0.97     18,835        365    1.94     16,803        527    3.13

Time deposits

     99,327        2,448    2.46     100,608        4,188    4.16     96,889        4,750    4.90

Fed funds sold/Repurchase agreements

     132        1    0.30     443        7    1.51     697        30    4.39

Short-term debt

     3,389        26    0.76     256        12    4.48     —          —      —  

Long-term debt

     9,546        413    4.33     13,186        568    4.30     14,266        653    4.58
                                                               

Total interest-bearing liabilities

     154,091        3,226        152,262        5,436        146,480        6,450   
                                                   

Cost of average interest bearing liabilities

        2.09        3.57        4.40
                                 

Noninterest-bearing liabilities

                     

Demand deposits

     26,011             25,398             27,142        

Interest payable and other

     1,794