Surrey Bancorp (Pink Sheets: SRYB), the holding company for Surrey Bank & Trust, reported net income for the quarter ending Sept. 30 was $774,843 or 19 cents per fully diluted share, up nearly 38 percent over the same quarter a year ago.

During that period in 2011, the company reported net income of $561,713, or 13 cents per share.

The company said the increase resulted from a reduction in the provision for loan losses. The provision for loan losses dropped from $188,118 in the third quarter of 2011 to $41,384 in the most recent quarter. “This decrease is due to a reduction in specific reserves associated with impaired loans during the third quarter of 2012 compared to the same quarter of 2011,” the company said. “Specific reserves on impaired loans decreased from $1,881,314 at Sept. 30, 2011, to $528,682 at Sept. 30, 2012. Much of the decrease is a result of charging off these impaired loans.”

The company went on to say the charge off of “these problem assets resulted in an overall increase in the credit quality of the loan portfolio. The reserve was further impacted by an increase in loans carrying government guarantees.”

On Sept. 30, the guaranteed portion of loans equaled 22.3 percent of total loans compared to 20.7 percent on Sept. 30 a year ago, the bank reported.

Net interest income increased from $2,263,325 in the third quarter of 2011 to $2,347,448 this year. “A reduction in the cost of deposits from the third quarter of 2011 to 2012 contributed to the margin improvement,” the firm said.

“Asset yields increased from 5.09 percent to 5.32 percent from 2011 to 2012 due to the change in earning asset mix from lower yielding deposits in other banks to higher yielding loans,” the company reported. “The cost of funds continued to decrease from 1.05 percent in the third quarter of 2011 to 0.85 percent in the third quarter of 2012. Noninterest income decreased 2.6 percent in 2012, primarily due to a reduction in service charges on deposit accounts. Noninterest expenses decreased 6.7 percent from $1,773,472 in the third quarter of 2011, to $1,654,467 in 2012. This decrease is primarily attributable to a $130,000 litigation settlement the Company paid in the third quarter of 2011 compared to no expense in 2012.”

Loan loss reserves were $3,733,177 or 2 percent of total loans as of Sept. 30. Non-performing assets were 1.95 percent of total assets at the close of Sept. 30, compared to 3.17 percent on that date in 2011. On Sept. 30, the allowance for loan loss reserves equals 90 percent of impaired and non-performing assets, net of government guarantees.

Total assets were $226,231,381 as of Sept. 30, a decrease of 1.21 percent from $229,007,209 reported as of Sept. 30, 2011. Total deposits were $183,465,913 at quarter-end 2012, a 2.57 percent decrease from the $188,299,291 reported at the end of the third quarter of 2011. Net loans increased 4.04 percent to $183,238,489, compared to $176,116,287 at Sept. 30, 2011.

Net income for the nine months ended Sept. 30 was $1,806,481 or 43 cents per diluted share, compared to $1,825,081, or 48 per diluted share, for the same period in 2011.