##### Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q







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

for the quarterly period ended June 30, 2010



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
|- | -----------------------------------------------------------------------

For the transition period from  to

COMMISSION FILE NO. 000-50313





SURREY BANCORP

(Exact name of registrant as specified in its charter)







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

145 North Renfro Street, Mount Airy, NC 27030

(Address of principal executive offices)

(336) 783-3900

(Registrants telephone number)





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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

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



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈ |  | Accelerated filer         |  |  ̈
|                        |  |   | 
|Non-accelerated filer   |  |  ̈ |  | Smaller reporting company |  | x

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

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

On August 6, 2010 there were 3,206,495 common shares issued and outstanding.









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##### Table of Contents

|                               |  |                                                                                                                                          |  |      
|------------------------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------- |  | -----
|PART I  FINANCIAL INFORMATION
|                               |  |                                                                                                                                         
|Item 1.                        |  | Consolidated Financial Statements                                                                                                        |  |      
|                               |  |                                                                                                                                         
|                               |  | Consolidated Balance Sheets June 30, 2010 (Unaudited) and December 31, 2009                                                              |  | 3    
|                               |  |                                                                                                                                         
|                               |  | Consolidated Statements of Income, Six Months Ended June 30, 2010 and 2009 (Unaudited)                                                   |  | 4    
|                               |  |                                                                                                                                         
|                               |  | Consolidated Statements of Income, Three Months Ended June 30, 2010 and 2009 (Unaudited)                                                 |  | 5    
|                               |  |                                                                                                                                         
|                               |  | Consolidated Statements of Cash Flows, Six Months Ended June 30, 2010 and 2009 (Unaudited)                                               |  | 6    
|                               |  |                                                                                                                                         
|                               |  | Consolidated Statements of Changes in Stockholders Equity and Comprehensive Income Six Months Ended June 30,
 2010 and 2009 (Unaudited) |  | 7    
|                               |  |                                                                                                                                         
|                               |  | Notes to Consolidated Financial Statements                                                                                               |  | 8-17 
|                               |  |                                                                                                                                         
|Item 2.                        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                    |  | 18-25
|                               |  |                                                                                                                                         
|Item 3.                        |  | Quantitative and Qualitative Disclosures about Market Risk                                                                               |  | 26   
|                               |  |                                                                                                                                         
|Item 4.                        |  | Controls and Procedures                                                                                                                  |  | 27   
|                              
|PART II  OTHER INFORMATION   
|                               |  |                                                                                                                                         
|Item 1.                        |  | Legal Proceedings                                                                                                                        |  | 28   
|                               |  |                                                                                                                                         
|Item 1A.                       |  | Risk Factors                                                                                                                             |  | 28   
|                               |  |                                                                                                                                         
|Item 2.                        |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                                              |  | 28   
|                               |  |                                                                                                                                         
|Item 3.                        |  | Defaults Upon Senior Securities                                                                                                          |  | 28   
|                               |  |                                                                                                                                         
|Item 4.                        |  | (Removed and Reserved)                                                                                                                   |  | 28   
|                               |  |                                                                                                                                         
|Item 5.                        |  | Other Information                                                                                                                        |  | 28   
|                               |  |                                                                                                                                         
|Item 6.                        |  | Exhibits                                                                                                                                 |  | 28   
|                               | 
|SIGNATURES                     |  | 29                                                                                                                                      
|                               | 
|CERTIFICATIONS                 |  | 30-32                                                                                                                                   



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##### Table of Contents

Consolidated Balance Sheets

June 30, 2010 (Unaudited) and December 31, 2009 (Audited)





|                                                                                                                                                                                                           |  |          |             |   |              |   |             |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------- | ----------- | - | ------------ | - | ----------- | -
|                                                                                                                                                                                                           |  | June2010 |             |   | December2009 |  
|                                                                                                                                                                                                           |  |         
|Assets                                                                                                                                                                                                     |  |          |             |   |              |   |             |  
|Cash and due from banks                                                                                                                                                                                    |  | $        | 2,199,549   |   |              | $ | 1,923,621   |  
|Interest-bearing deposits with banks                                                                                                                                                                       |  |          | 25,173,137  |   |              |   | 19,067,374  |  
|Federal funds sold                                                                                                                                                                                         |  |          | 501,032     |   |              |   | 412,947     |  
|Investment securities available for sale                                                                                                                                                                   |  |          | 2,030,258   |   |              |   | 2,011,925   |  
|Restricted equity securities                                                                                                                                                                               |  |          | 1,047,504   |   |              |   | 1,047,514   |  
|Loans, net of allowance for loan losses of $5,642,987 at June 30, 2010 and $4,669,905 at December 31,
2009                                                                                                 |  |          | 174,712,965 |   |              |   | 180,442,154 |  
|Property and equipment, net                                                                                                                                                                                |  |          | 4,786,734   |   |              |   | 4,881,770   |  
|Foreclosed assets                                                                                                                                                                                          |  |          | 294,525     |   |              |   | 53,336      |  
|Accrued income                                                                                                                                                                                             |  |          | 1,045,818   |   |              |   | 1,032,989   |  
|Goodwill                                                                                                                                                                                                   |  |          | 120,000     |   |              |   | 120,000     |  
|Bank owned life insurance                                                                                                                                                                                  |  |          | 3,228,615   |   |              |   | 3,173,307   |  
|Other assets                                                                                                                                                                                               |  |          | 3,628,895   |   |              |   | 2,782,845   |  
|                                                                                                                                                                                                           |  |          |             |   |              |   |             |  
|Total assets                                                                                                                                                                                               |  | $        | 218,769,032 |   |              | $ | 216,949,782 |  
|                                                                                                                                                                                                           |  |          |             |   |              |   |             |  
|                                                                                                                                                                                                           |  |         
|Liabilities and Stockholders Equity                                                                                                                                                                       |  |          |             |   |              |   |             |  
|Liabilities                                                                                                                                                                                                |  |          |             |   |              |   |             |  
|Deposits:                                                                                                                                                                                                  |  |          |             |   |              |   |             |  
|Noninterest-bearing                                                                                                                                                                                        |  | $        | 30,723,615  |   |              | $ | 24,709,970  |  
|Interest-bearing                                                                                                                                                                                           |  |          | 146,849,065 |   |              |   | 149,264,588 |  
|                                                                                                                                                                                                           |  |          |             |   |              |   |             |  
|Total deposits                                                                                                                                                                                             |  |          | 177,572,680 |   |              |   | 173,974,558 |  
|                                                                                                                                                                                                           |  |         
|Short-term debt                                                                                                                                                                                            |  |          |            |   |              |   | 3,750,000   |  
|Long-term debt                                                                                                                                                                                             |  |          | 9,950,000   |   |              |   | 9,200,000   |  
|Dividends payable                                                                                                                                                                                          |  |          | 43,670      |   |              |   | 44,603      |  
|Accrued interest payable                                                                                                                                                                                   |  |          | 287,115     |   |              |   | 291,111     |  
|Other liabilities                                                                                                                                                                                          |  |          | 1,758,187   |   |              |   | 1,264,158   |  
|                                                                                                                                                                                                           |  |          |             |   |              |   |             |  
|Total liabilities                                                                                                                                                                                          |  |          | 189,611,652 |   |              |   | 188,524,430 |  
|                                                                                                                                                                                                           |  |          |             |   |              |   |             |  
|                                                                                                                                                                                                           |  |         
|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;                          |  |          | 1,920,514   |   |              |   | 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                             |  |          | 101,753     |   |              |   | 103,222     |  
|Common stock, 10,000,000 shares authorized at no par value; 3,206,495 and 3,198,105 shares issued and outstanding at
June 30, 2010 and December 31, 2009, respectively                                     |  |          | 9,455,395   |   |              |   | 9,406,429   |  
|Retained earnings                                                                                                                                                                                          |  |          | 15,119,825  |   |              |   | 14,468,089  |  
|Accumulated other comprehensive loss                                                                                                                                                                       |  |          | (60,432     | ) |              |   | (75,996     | )
|                                                                                                                                                                                                           |  |          |             |   |              |   |             |  
|Total stockholders equity                                                                                                                                                                                 |  |          | 29,157,380  |   |              |   | 28,425,352  |  
|                                                                                                                                                                                                           |  |          |             |   |              |   |             |  
|Total liabilities and stockholders equity                                                                                                                                                                 |  | $        | 218,769,032 |   |              | $ | 216,949,782 |  
|                                                                                                                                                                                                           |  |          |             |   |              |   |             |  

See Notes to Consolidated Financial Statements



3



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##### Table of Contents

Consolidated Statements of Income

Six months ended June 30, 2010 and 2009 (Unaudited)





|                                                                           |  |      |           |   |      |   |           |  
|-------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|                                                                           |  | 2010 |           |   | 2009 |  
|                                                                           |  |     
|Interest income                                                            |  |      |           |   |      |   |           |  
|Loans and fees on loans                                                    |  | $    | 5,539,444 |   |      | $ | 5,254,367 |  
|Federal funds sold                                                         |  |      | 404       |   |      |   | 271       |  
|Investment securities, taxable                                             |  |      | 25,663    |   |      |   | 37,669    |  
|Deposits with banks                                                        |  |      | 11,711    |   |      |   | 12,362    |  
|                                                                           |  |      |           |   |      |   |           |  
|Total interest income                                                      |  |      | 5,577,222 |   |      |   | 5,304,669 |  
|                                                                           |  |      |           |   |      |   |           |  
|                                                                           |  |     
|Interest expense                                                           |  |      |           |   |      |   |           |  
|Deposits                                                                   |  |      | 1,042,286 |   |      |   | 1,530,024 |  
|Federal funds purchased and securities sold under agreements to repurchase |  |      |          |   |      |   | 400       |  
|Short-term debt                                                            |  |      | 17,720    |   |      |   | 13,599    |  
|Long-term debt                                                             |  |      | 203,463   |   |      |   | 213,697   |  
|                                                                           |  |      |           |   |      |   |           |  
|Total interest expense                                                     |  |      | 1,263,469 |   |      |   | 1,757,720 |  
|                                                                           |  |      |           |   |      |   |           |  
|Net interest income                                                        |  |      | 4,313,753 |   |      |   | 3,546,949 |  
|                                                                           |  |     
|Provision for loan losses                                                  |  |      | 1,203,842 |   |      |   | 753,996   |  
|                                                                           |  |      |           |   |      |   |           |  
|Net interest income after provision for loan losses                        |  |      | 3,109,911 |   |      |   | 2,792,953 |  
|                                                                           |  |      |           |   |      |   |           |  
|                                                                           |  |     
|Noninterest income                                                         |  |      |           |   |      |   |           |  
|Service charges on deposit accounts                                        |  |      | 532,477   |   |      |   | 540,034   |  
|Gain on sale of government guaranteed loans                                |  |      | 244,924   |   |      |   |          |  
|Fees and yield spread premiums on loans delivered to correspondents        |  |      | 49,737    |   |      |   | 88,870    |  
|Other service charges and fees                                             |  |      | 223,049   |   |      |   | 186,827   |  
|Other operating income                                                     |  |      | 369,462   |   |      |   | 330,842   |  
|Life insurance proceeds                                                    |  |      |          |   |      |   | 1,000,000 |  
|                                                                           |  |      |           |   |      |   |           |  
|Total noninterest income                                                   |  |      | 1,419,649 |   |      |   | 2,146,573 |  
|                                                                           |  |      |           |   |      |   |           |  
|                                                                           |  |     
|Noninterest expense                                                        |  |      |           |   |      |   |           |  
|Salaries and employee benefits                                             |  |      | 1,723,400 |   |      |   | 1,710,893 |  
|Occupancy expense                                                          |  |      | 197,230   |   |      |   | 222,320   |  
|Equipment expense                                                          |  |      | 136,383   |   |      |   | 143,195   |  
|Data processing                                                            |  |      | 196,774   |   |      |   | 190,050   |  
|Foreclosed assets, net                                                     |  |      | 15,682    |   |      |   | 44,909    |  
|FDIC insurance premiums                                                    |  |      | 118,281   |   |      |   | 171,706   |  
|Other expense                                                              |  |      | 906,105   |   |      |   | 896,696   |  
|                                                                           |  |      |           |   |      |   |           |  
|Total noninterest expense                                                  |  |      | 3,293,855 |   |      |   | 3,379,769 |  
|                                                                           |  |      |           |   |      |   |           |  
|Net income before income taxes                                             |  |      | 1,235,705 |   |      |   | 1,559,757 |  
|                                                                           |  |     
|Income tax expense                                                         |  |      | 455,156   |   |      |   | 157,938   |  
|                                                                           |  |      |           |   |      |   |           |  
|Net income                                                                 |  |      | 780,549   |   |      |   | 1,401,819 |  
|                                                                           |  |     
|Preferred stock dividends and accretion of discount                        |  |      | (128,813  | ) |      |   | (126,991  | )
|                                                                           |  |      |           |   |      |   |           |  
|Net income available to common stockholders                                |  | $    | 651,736   |   |      | $ | 1,274,828 |  
|                                                                           |  |      |           |   |      |   |           |  
|                                                                           |  |     
|Basic earnings per common share                                            |  | $    | 0.20      |   |      | $ | 0.40      |  
|                                                                           |  |      |           |   |      |   |           |  
|Diluted earnings per common share                                          |  | $    | 0.20      |   |      | $ | 0.37      |  
|                                                                           |  |      |           |   |      |   |           |  
|Basic weighted average common shares outstanding                           |  |      | 3,206,263 |   |      |   | 3,188,223 |  
|                                                                           |  |      |           |   |      |   |           |  
|Diluted weighted average common shares outstanding                         |  |      | 3,604,913 |   |      |   | 3,587,644 |  
|                                                                           |  |      |           |   |      |   |           |  

See Notes to Consolidated Financial Statements



4



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##### Table of Contents

Consolidated Statements of Income

Three months ended June 30, 2010 and 2009 (Unaudited)





|                                                                           |  |      |           |   |      |   |           |  
|-------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|                                                                           |  | 2010 |           |   | 2009 |  
|                                                                           |  |     
|Interest income                                                            |  |      |           |   |      |   |           |  
|Loans and fees on loans                                                    |  | $    | 2,774,256 |   |      | $ | 2,633,055 |  
|Federal funds sold                                                         |  |      | 248       |   |      |   | 130       |  
|Investment securities, taxable                                             |  |      | 12,035    |   |      |   | 17,596    |  
|Deposits with banks                                                        |  |      | 7,558     |   |      |   | 5,974     |  
|                                                                           |  |      |           |   |      |   |           |  
|Total interest income                                                      |  |      | 2,794,097 |   |      |   | 2,656,755 |  
|                                                                           |  |      |           |   |      |   |           |  
|                                                                           |  |     
|Interest expense                                                           |  |      |           |   |      |   |           |  
|Deposits                                                                   |  |      | 516,011   |   |      |   | 721,932   |  
|Federal funds purchased and securities sold under agreements to repurchase |  |      |          |   |      |   | 13        |  
|Short-term debt                                                            |  |      | 13,959    |   |      |   | 5,905     |  
|Long-term debt                                                             |  |      | 104,387   |   |      |   | 105,629   |  
|                                                                           |  |      |           |   |      |   |           |  
|Total interest expense                                                     |  |      | 634,357   |   |      |   | 833,479   |  
|                                                                           |  |      |           |   |      |   |           |  
|Net interest income                                                        |  |      | 2,159,740 |   |      |   | 1,823,276 |  
|                                                                           |  |     
|Provision for loan losses                                                  |  |      | 254,485   |   |      |   | (720      | )
|                                                                           |  |      |           |   |      |   |           |  
|Net interest income after provision for loan losses                        |  |      | 1,905,255 |   |      |   | 1,823,996 |  
|                                                                           |  |      |           |   |      |   |           |  
|                                                                           |  |     
|Noninterest income                                                         |  |      |           |   |      |   |           |  
|Service charges on deposit accounts                                        |  |      | 270,302   |   |      |   | 253,317   |  
|Gain on sale of government guaranteed loans                                |  |      | 32,865    |   |      |   |          |  
|Fees and yield spread premiums on loans delivered to correspondents        |  |      | 23,054    |   |      |   | 59,153    |  
|Other service charges and fees                                             |  |      | 123,914   |   |      |   | 97,080    |  
|Other operating income                                                     |  |      | 164,754   |   |      |   | 162,256   |  
|                                                                           |  |      |           |   |      |   |           |  
|Total noninterest income                                                   |  |      | 614,889   |   |      |   | 571,806   |  
|                                                                           |  |      |           |   |      |   |           |  
|                                                                           |  |     
|Noninterest expense                                                        |  |      |           |   |      |   |           |  
|Salaries and employee benefits                                             |  |      | 852,390   |   |      |   | 850,901   |  
|Occupancy expense                                                          |  |      | 87,921    |   |      |   | 106,647   |  
|Equipment expense                                                          |  |      | 72,347    |   |      |   | 78,442    |  
|Data processing                                                            |  |      | 100,215   |   |      |   | 100,974   |  
|Foreclosed assets, net                                                     |  |      | 11,490    |   |      |   | 26,980    |  
|FDIC insurance premiums                                                    |  |      | 66,399    |   |      |   | 145,415   |  
|Other expense                                                              |  |      | 446,353   |   |      |   | 441,129   |  
|                                                                           |  |      |           |   |      |   |           |  
|Total noninterest expense                                                  |  |      | 1,637,115 |   |      |   | 1,750,488 |  
|                                                                           |  |      |           |   |      |   |           |  
|Net income before income taxes                                             |  |      | 883,029   |   |      |   | 645,314   |  
|                                                                           |  |     
|Income tax expense                                                         |  |      | 332,256   |   |      |   | 229,163   |  
|                                                                           |  |      |           |   |      |   |           |  
|Net income                                                                 |  |      | 550,773   |   |      |   | 416,151   |  
|                                                                           |  |     
|Preferred stock dividends and accretion of discount                        |  |      | (65,753   | ) |      |   | (65,358   | )
|                                                                           |  |      |           |   |      |   |           |  
|Net income available to common stockholders                                |  | $    | 485,020   |   |      | $ | 350,793   |  
|                                                                           |  |      |           |   |      |   |           |  
|                                                                           |  |     
|Basic earnings per common share                                            |  | $    | 0.15      |   |      | $ | 0.11      |  
|                                                                           |  |      |           |   |      |   |           |  
|Diluted earnings per common share                                          |  | $    | 0.14      |   |      | $ | 0.11      |  
|                                                                           |  |      |           |   |      |   |           |  
|Basic weighted average common shares outstanding                           |  |      | 3,206,495 |   |      |   | 3,196,581 |  
|                                                                           |  |      |           |   |      |   |           |  
|Diluted weighted average common shares outstanding                         |  |      | 3,605,146 |   |      |   | 3,600,201 |  
|                                                                           |  |      |           |   |      |   |           |  

See Notes to Consolidated Financial Statements



5



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##### Table of Contents

Consolidated Statements of Cash Flows

Six months ended June 30, 2010 and 2009 (Unaudited)





|                                                                                             |  |      |            |   |      |   |            |  
|-------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                                             |  | 2010 |            |   | 2009 |  
|Cash flows from operating activities                                                         |  |      |            |   |      |   |            |  
|Net income                                                                                   |  | $    | 780,549    |   |      | $ | 1,401,819  |  
|Adjustments to reconcile net income to net cash provided by operations:                      |  |      |            |   |      |   |            |  
|Depreciation and amortization                                                                |  |      | 127,763    |   |      |   | 137,741    |  
|Gain on the sale of property and equipment                                                   |  |      | (300       | ) |      |   | (320       | )
|Loss on the sale of foreclosed assets                                                        |  |      | 9,411      |   |      |   | 25,164     |  
|Stock-based compensation, net of tax benefit                                                 |  |      | 14,516     |   |      |   | 15,017     |  
|Provision for loan losses                                                                    |  |      | 1,203,842  |   |      |   | 753,996    |  
|Deferred income taxes                                                                        |  |      | 12,724     |   |      |   | (45,865    | )
|Accretion of discount on securities, net of amortization of premiums                         |  |      | 1,944      |   |      |   | 5,238      |  
|Increase in cash surrender value of life insurance                                           |  |      | (55,308    | ) |      |   | (54,854    | )
|Changes in assets and liabilities:                                                           |  |      |            |   |      |   |            |  
|Accrued income                                                                               |  |      | (12,829    | ) |      |   | 163,984    |  
|Other assets                                                                                 |  |      | (868,538   | ) |      |   | (562,481   | )
|Accrued interest payable                                                                     |  |      | (3,996     | ) |      |   | (103,473   | )
|Other liabilities                                                                            |  |      | 494,029    |   |      |   | 438,488    |  
|                                                                                             |  |      |            |   |      |   |            |  
|Net cash provided by operating activities                                                    |  |      | 1,703,807  |   |      |   | 2,174,454  |  
|                                                                                             |  |      |            |   |      |   |            |  
|                                                                                             |  |     
|Cash flows from investing activities                                                         |  |      |            |   |      |   |            |  
|Net (increase) in interest-bearing deposits with banks                                       |  |      | (6,105,763 | ) |      |   | (673,713   | )
|Net (increase) in federal funds sold                                                         |  |      | (88,085    | ) |      |   | (100,000   | )
|Purchases of investment securities                                                           |  |      | (1,500,000 | ) |      |   | (1,499,663 | )
|Sales and maturities of investment securities                                                |  |      | 1,505,051  |   |      |   | 1,008,281  |  
|Redemption of restricted equity securities                                                   |  |      | 10         |   |      |   | 168,900    |  
|Purchases of restricted equity securities                                                    |  |      |           |   |      |   | (112,575   | )
|Net decrease in loans                                                                        |  |      | 4,219,857  |   |      |   | 1,226,902  |  
|Proceeds from the sale of foreclosed assets                                                  |  |      | 54,890     |   |      |   | 133,145    |  
|Proceeds from the sale of property and equipment                                             |  |      | 300        |   |      |   | 320        |  
|Purchases of property and equipment                                                          |  |      | (32,727    | ) |      |   | (72,394    | )
|                                                                                             |  |      |            |   |      |   |            |  
|Net cash (used in) provided by investing activities                                          |  |      | (1,946,467 | ) |      |   | 79,203     |  
|                                                                                             |  |      |            |   |      |   |            |  
|                                                                                             |  |     
|Cash flows from financing activities                                                         |  |      |            |   |      |   |            |  
|Net increase in deposits                                                                     |  |      | 3,598,122  |   |      |   | 622,123    |  
|Net (decrease) in federal funds purchased and securities sold under agreements to repurchase |  |      |           |   |      |   | (2,054,037 | )
|Net (decrease) in short-term debt                                                            |  |      | (3,750,000 | ) |      |   | (490,000   | )
|Increase (decrease) in long-term debt                                                        |  |      | 750,000    |   |      |   | (1,500,000 | )
|Dividends paid                                                                               |  |      | (113,984   | ) |      |   | (97,553    | )
|Common stock options exercised                                                               |  |      | 34,450     |   |      |   | 82,322     |  
|Proceeds from the issuance of preferred stock, net                                           |  |      |           |   |      |   | 1,975,015  |  
|Tax benefit related to exercise of non-incentive stock options                               |  |      |           |   |      |   | 19,903     |  
|                                                                                             |  |      |            |   |      |   |            |  
|Net cash provided by (used in) financing activities                                          |  |      | 518,588    |   |      |   | (1,442,227 | )
|                                                                                             |  |      |            |   |      |   |            |  
|Net increase in cash and cash equivalents                                                    |  |      | 275,928    |   |      |   | 811,430    |  
|                                                                                             |  |     
|Cash and cash equivalents, beginning                                                         |  |      | 1,923,621  |   |      |   | 1,293,770  |  
|                                                                                             |  |      |            |   |      |   |            |  
|Cash and cash equivalents, ending                                                            |  | $    | 2,199,549  |   |      | $ | 2,105,200  |  
|                                                                                             |  |      |            |   |      |   |            |  
|                                                                                             |  |     
|Supplemental disclosures of cash flow information                                            |  |      |            |   |      |   |            |  
|Interest paid                                                                                |  | $    | 1,267,465  |   |      | $ | 1,861,193  |  
|                                                                                             |  |      |            |   |      |   |            |  
|Taxes paid                                                                                   |  | $    | 819,457    |   |      | $ | 339,075    |  
|                                                                                             |  |      |            |   |      |   |            |  
|Loans transferred to foreclosed properties                                                   |  | $    | 305,490    |   |      | $ | 190,905    |  
|                                                                                             |  |      |            |   |      |   |            |  

See Notes to Consolidated Financial Statements



6



---

##### Table of Contents

Consolidated Statements of Changes in Stockholders Equity and Comprehensive
Income

Six months ended June 30, 2010 and 2009 (Unaudited)





|                                                                                                                              |  |                                     |  |                          |           |        |                          |        |   |              |        |                  |        |  |                                                   |         |   |        |           |  |   |           |  |   |            |   |  |   |         |   |  |   |            |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------- |  | ------------------------ | --------- | ------ | ------------------------ | ------ | - | ------------ | ------ | ---------------- | ------ |  | ------------------------------------------------- | ------- | - | ------ | --------- |  | - | --------- |  | - | ---------- | - |  | - | ------- | - |  | - | ---------- | -
|                                                                                                                              |  | ConvertiblePreferred Stock Series A |  | Preferred Stock Series B |           |        | Preferred Stock Series C |        |   | Common Stock |        | RetainedEarnings |        |  | UnrealizedAppreciation(Depreciation) onSecurities |         |   | Total  |          
|                                                                                                                              |  | Shares                              |  | Amount                   |           | Shares |                          | Amount |   |              | Shares |                  | Amount |  |                                                   | Shares  |   | Amount |           |  |  
|                                                                                                                              |  |                                     |  |                          |           |        |                          |        |   |              |       
|Balance, January 1, 2009                                                                                                      |  | 189,356                             |  | $                        | 2,620,325 |        |                         |        | $ |             |        |                  |       |  | $                                                 |        |   |        | 3,167,568 |  | $ | 9,270,253 |  | $ | 12,493,763 |   |  | $ | (1,338  | ) |  | $ | 24,383,003 |  
|                                                                                                                              |  |                                     |  |                          |           |        |                          |        |   |              |       
|Comprehensive income                                                                                                          |  |                                     |  |                          |           |        |                          |        |   |              |        |                  |        |  |                                                   |         |   |        |           |  |   |           |  |   |            |   |  |   |         |   |  |   |            |  
|Net income                                                                                                                    |  |                                    |  |                          |          |        |                         |        |   |             |        |                  |       |  |                                                   |        |   |        |          |  |   |          |  |   | 1,401,819  |   |  |   |        |   |  |   | 1,401,819  |  
|Net change in unrealized gain on investment securities available for sale, net of income tax of $6,909                        |  |                                    |  |                          |          |        |                         |        |   |             |        |                  |       |  |                                                   |        |   |        |          |  |   |          |  |   |           |   |  |   | (9,674  | ) |  |   | (9,674     | )
|                                                                                                                              |  |                                     |  |                          |           |        |                          |        |   |              |        |                  |        |  |                                                   |         |   |        |           |  |   |           |  |   |            |   |  |   |         |   |  |   |            |  
|Total comprehensive income                                                                                                    |  |                                     |  |                          |           |        |                          |        |   |              |        |                  |        |  |                                                   |         |   |        |           |  |   |           |  |   |            |   |  |   |         |   |  |   | 1,392,145  |  
|                                                                                                                              |  |                                     |  |                          |           |        |                          |        |   |              |       
|Common stock options exercised                                                                                                |  |                                    |  |                          |          |        |                         |        |   |             |        |                  |       |  |                                                   |        |   |        | 29,013    |  |   | 82,322    |  |   |           |   |  |   |        |   |  |   | 82,322     |  
|Tax benefit related to exercise of non-qualified stock options                                                                |  |                                    |  |                          |          |        |                         |        |   |             |        |                  |       |  |                                                   |        |   |        |          |  |   | 19,903    |  |   |           |   |  |   |        |   |  |   | 19,903     |  
|Stock-based compensation, net of tax benefit                                                                                  |  |                                    |  |                          |          |        |                         |        |   |             |        |                  |       |  |                                                   |        |   |        |          |  |   | 15,017    |  |   |           |   |  |   |        |   |  |   | 15,017     |  
|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 ($.31 per share)                                                   |  |                                    |  |                          |          |        |                         |        |   |             |        |                  |       |  |                                                   |        |   |        |          |  |   |          |  |   | (59,157    | ) |  |   |        |   |  |   | (59,157    | )
|Dividends declared and accrued on Series B and Series C preferred stock, net of discount accretion and (premium) amortization |  |                                    |  |                          |          |        |                         |        |   | 16,747       |        |                  |       |  |                                                   | (1,294  | ) |        |          |  |   |          |  |   | (67,834    | ) |  |   |        |   |  |   | (52,381    | )
|                                                                                                                              |  |                                     |  |                          |           |        |                          |        |   |              |        |                  |        |  |                                                   |         |   |        |           |  |   |           |  |   |            |   |  |   |         |   |  |   |            |  
|Balance, June 30, 2009                                                                                                        |  | 189,356                             |  | $                        | 2,620,325 |        | 2,000                    |        | $ | 1,885,762    |        |                  | 100    |  | $                                                 | 104,706 |   |        | 3,196,581 |  | $ | 9,387,495 |  | $ | 13,768,591 |   |  | $ | (11,012 | ) |  | $ | 27,755,867 |  
|                                                                                                                              |  |                                     |  |                          |           |        |                          |        |   |              |        |                  |        |  |                                                   |         |   |        |           |  |   |           |  |   |            |   |  |   |         |   |  |   |            |  
|                                                                                                                              |  |                                     |  |                          |           |        |                          |        |   |              |       
|Balance, January 1, 2010                                                                                                      |  | 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 |  
|                                                                                                                              |  |                                     |  |                          |           |        |                          |        |   |              |       
|Comprehensive income                                                                                                          |  |                                     |  |                          |           |        |                          |        |   |              |        |                  |        |  |                                                   |         |   |        |           |  |   |           |  |   |            |   |  |   |         |   |  |   |            |  
|Net income                                                                                                                    |  |                                    |  |                          |          |        |                         |        |   |             |        |                  |       |  |                                                   |        |   |        |          |  |   |          |  |   | 780,549    |   |  |   |        |   |  |   | 780,549    |  
|Net change in unrealized gain on investment securities available for sale, net of income tax of $9,764                        |  |                                    |  |                          |          |        |                         |        |   |             |        |                  |       |  |                                                   |        |   |        |          |  |   |          |  |   |           |   |  |   | 15,564  |   |  |   | 15,564     |  
|                                                                                                                              |  |                                     |  |                          |           |        |                          |        |   |              |        |                  |        |  |                                                   |         |   |        |           |  |   |           |  |   |            |   |  |   |         |   |  |   |            |  
|Total comprehensive income                                                                                                    |  |                                     |  |                          |           |        |                          |        |   |              |        |                  |        |  |                                                   |         |   |        |           |  |   |           |  |   |            |   |  |   |         |   |  |   | 796,113    |  
|                                                                                                                              |  |                                     |  |                          |           |        |                          |        |   |              |       
|Common stock options exercised                                                                                                |  |                                    |  |                          |          |        |                         |        |   |             |        |                  |       |  |                                                   |        |   |        | 8,390     |  |   | 34,450    |  |   |           |   |  |   |        |   |  |   | 34,450     |  
|Stock-based compensation, net of tax benefit                                                                                  |  |                                    |  |                          |          |        |                         |        |   |             |        |                  |       |  |                                                   |        |   |        |          |  |   | 14,516    |  |   |           |   |  |   |        |   |  |   | 14,516     |  
|Dividends declared on convertible Series A preferred stock ($.31 per share)                                                   |  |                                    |  |                          |          |        |                         |        |   |             |        |                  |       |  |                                                   |        |   |        |          |  |   |          |  |   | (59,157    | ) |  |   |        |   |  |   | (59,157    | )
|Dividends declared and accrued on Series B and Series C preferred stock, net of discount accretion and (premium) amortization |  |                                    |  |                          |          |        |                         |        |   | 17,231       |        |                  |       |  |                                                   | (1,469  | ) |        |          |  |   |          |  |   | (69,656    | ) |  |   |        |   |  |   | (53,894    | )
|                                                                                                                              |  |                                     |  |                          |           |        |                          |        |   |              |        |                  |        |  |                                                   |         |   |        |           |  |   |           |  |   |            |   |  |   |         |   |  |   |            |  
|Balance, June 30, 2010                                                                                                        |  | 189,356                             |  | $                        | 2,620,325 |        | 2,000                    |        | $ | 1,920,514    |        |                  | 100    |  | $                                                 | 101,753 |   |        | 3,206,495 |  | $ | 9,455,395 |  | $ | 15,119,825 |   |  | $ | (60,432 | ) |  | $ | 29,157,380 |  
|                                                                                                                              |  |                                     |  |                          |           |        |                          |        |   |              |        |                  |        |  |                                                   |         |   |        |           |  |   |           |  |   |            |   |  |   |         |   |  |   |            |  

See Notes to Consolidated Financial Statements



7



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##### Table of Contents

SURREY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. BASIS OF PRESENTATION

The
accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and therefore, do not include all disclosures required by generally accepted accounting principles for a complete presentation of
financial statements. In the opinion of management, the consolidated financial statements contain all adjustments necessary to present fairly the financial condition of Surrey Bancorp, (the Company), as of June 30, 2010, the results of
operations for the six and three months ended June 30, 2010 and 2009, and its changes in stockholders equity and comprehensive income and cash flows for the six months ended June 30, 2010 and 2009. All adjustments are of a normal and
recurring nature. The results of operations for the six months ended June 30, 2010, are not necessarily indicative of the results expected for the full year. These consolidated financial statements should be read in conjunction with the
Companys audited financial statements and related disclosures for the year ended December 31, 2009, included in the Companys Form 10-K. The balance sheet at December 31, 2009, has been taken from the audited financial
statements at that date.

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. Stockholders of the bank received six shares of Surrey Bancorp common stock for every five shares of Surrey Bank & Trust common stock owned. The Company is subject to regulation by the Federal
Reserve.

Surrey Bank & Trust (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, a subsidiary operation specializing in the purchase of sales finance
contracts from local automobile dealers.

The accounting and reporting policies of the Company, the Bank, and its subsidiaries follow
generally accepted accounting principles and general practices within the financial services industry. Following is a summary of the more significant policies.

Critical Accounting Policies

The
notes to the audited consolidated financial statements for the year ended December 31, 2009 contain a summary of the significant accounting policies. The Company believes our policies with respect to the methodology for the determination of the
allowance for loan losses, and asset impairment judgments, including the recoverability of intangible assets involve a higher degree of complexity and require management to make difficult and subjective judgments which often require assumptions or
estimates about highly uncertain matters. Changes in these judgments, assumptions or estimates could cause reported results to differ materially. These critical policies and their application are periodically reviewed with the Audit Committee and
our Board of Directors. See our Annual Report for full details on critical accounting policies.

Principles of Consolidation

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



8



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##### Table of Contents

SURREY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1. BASIS OF PRESENTATION, CONTINUED



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.

Presentation of Cash Flows

For
purposes of reporting cash flows, cash and cash equivalents includes cash and amounts due from depository institutions (including cash items in process of collection). Overnight interest bearing deposits and federal funds sold are shown separately.
Federal funds purchased are shown with securities sold under agreements to repurchase.

Investment Securities

Investments classified as available for sale are intended to be held for indefinite periods of time and include those securities that management may
employ as part of asset/liability strategy or that may be sold in response to changes in interest rates, prepayments, regulatory capital requirements or similar factors. These securities are carried at fair value and are based on quoted market
prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments or significant other observable inputs.

Investment securities classified as held to maturity are those debt securities that the Bank has the ability and intent to hold to maturity. Accordingly,
these securities are carried at cost adjusted for amortization of premiums and accretion of discount, computed by the interest-method over their contractual lives. At June 30, 2010 and December 31, 2009, the Bank had no investments
classified as held to maturity.

Loans Held for Sale

The Bank originates and holds Small Business Administration (SBA) and United States Department of Agriculture (USDA) guaranteed loans in its portfolio in
the normal course of business. Occasionally, the Bank sells the guaranteed portions of these loans into the secondary market. The loans are generally variable rate loans, which eliminates the interest rate risk resulting in cost approximating market
value. The Bank carries the loans at the lower of cost or market. The Bank recognizes gains on the sale of the guaranteed portion upon the consummation of the transaction. The Bank plans to continue to originate guaranteed loans for sales, however
no such loans were funded at June 30, 2010 and December 31, 2009.

Loans Receivable

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their
outstanding principal amount adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or cost on originated loans and unamortized premiums or discounts on purchased loans.

The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. The allowance is
increased by provisions charged to operating expense and reduced by net charge-offs. The Bank makes continuous credit reviews of the loan portfolio and considers economic conditions, historical loan loss experience, review of specific problem loans
and other factors in determining the adequacy of the allowance balance.



9



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##### Table of Contents

SURREY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1. BASIS OF PRESENTATION, CONTINUED



Loans Receivable, continued



Activity in the allowance for loan losses for the six months ended June 30, 2010 and 2009 follows:



|                                 |  |          |           |   |      |   |           |  
|-------------------------------- |  | -------- | --------- | - | ---- | - | --------- | -
|                                 |  | June 30, |          
|                                 |  | 2010     |           |   | 2009 |  
|                                 |  |         
|Balance at beginning of year     |  | $        | 4,669,905 |   |      | $ | 3,365,370 |  
|Add provision charged to expense |  |          | 1,203,842 |   |      |   | 753,996   |  
|Less net charge-offs             |  |          | (230,760  | ) |      |   | (179,450  | )
|                                 |  |          |           |   |      |   |           |  
|                                 |  | $        | 5,642,987 |   |      | $ | 3,939,916 |  
|                                 |  |          |           |   |      |   |           |  

Interest on all loans is accrued daily on the outstanding balance. Accrual of interest is discontinued on a loan when
management believes, after considering collection efforts and other factors, the borrowers financial condition is such that collection of interest is doubtful.

Recent Accounting Pronouncements

The following is a summary of recent authoritative pronouncements:

Income Tax guidance was amended in April 2010 to reflect an SEC Staff Announcement after the President signed the Health Care and Education
Reconciliation Act of 2010 on March 30, 2010, which amended the Patient Protection and Affordable Care Act signed on March 23, 2010. According to the announcement, although the bills were signed on separate dates, regulatory bodies would
not object if the two Acts were considered together for accounting purposes. This view is based on the SEC staffs understanding that the two Acts together represent the current health care reforms as passed by Congress and signed by the
President. The amendment had no impact on the financial statements.

In July 2010, Financial Accounting Standards Board (FASB)
issued new guidance regarding disclosures about the credit quality of financing receivables and the allowance for credit losses ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses).
This guidance requires additional disclosures about the credit quality of financing receivables, such as aging information and credit quality indicators. In addition, disclosures must be disaggregated by portfolio segment or class based on how a
company develops its allowance for credit losses and how it manages its credit exposure. Most of the requirements are effective for the fourth quarter of 2010 with certain additional disclosures required for the first quarter of 2011. The Company is
currently evaluating the impact of this guidance on its consolidated financial statements.

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

Subsequent Events

In accordance
with accounting guidance, the Company evaluated events and transactions for potential recognition or disclosure in these financial statements through the date the financial statements were issued.



10



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##### Table of Contents

SURREY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 2. SECURITIES

Debt and equity securities have been classified in the balance sheets according to managements intent. The carrying amounts of securities available
for sale and their approximate fair values at June 30, 2010 and December 31, 2009 follow:



|                                 |  |               |           |                 |   |                  |  |           |         |  |   |          
|-------------------------------- |  | ------------- | --------- | --------------- | - | ---------------- |  | --------- | ------- |  | - | ---------
|                                 |  | AmortizedCost |           | UnrealizedGains |   | UnrealizedLosses |  | FairValue
|                                 |  |               |           |                
|June 30, 2010                    |  |               |           |                 |   |                  |  |           |         |  |   |          
|Government-sponsored enterprises |  | $             | 1,500,000 |                 | $ | 6,315            |  | $         |        |  | $ | 1,506,315
|Mortgage-backed securities       |  |               | 78,602    |                 |   | 3,341            |  |           |        |  |   | 81,943   
|Corporate bonds                  |  |               | 550,000   |                 |   |                 |  |           | 108,000 |  |   | 442,000  
|                                 |  |               |           |                 |   |                  |  |           |         |  |   |          
|                                 |  | $             | 2,128,602 |                 | $ | 9,656            |  | $         | 108,000 |  | $ | 2,030,258
|                                 |  |               |           |                 |   |                  |  |           |         |  |   |          
|                                 |  |               |           |                
|December 31, 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
|                                 |  |               |           |                 |   |                  |  |           |         |  |   |          

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 June 30, 2010, were as follows:



|                                       |  |               |           |           |   |          
|-------------------------------------- |  | ------------- | --------- | --------- | - | ---------
|                                       |  | AmortizedCost |           | FairValue
|                                       |  |              
|Due in one year or less                |  | $             |          |           | $ |         
|Due after one year through five years  |  |               | 1,500,000 |           |   | 1,506,315
|Due after five years through ten years |  |               | 612,312   |           |   | 506,986  
|Due after ten years                    |  |               | 16,290    |           |   | 16,957   
|                                       |  |               |           |           |   |          
|                                       |  | $             | 2,128,602 |           | $ | 2,030,258
|                                       |  |               |           |           |   |          

The following table shows investments gross unrealized losses
and fair value, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position, at June 30, 2010 and December 31, 2009. These unrealized losses on investment
securities are a result of volatility in interest rates and primarily relate to government-sponsored enterprises and corporate bonds issued by other banks at June 30, 2010 and December 31, 2009.



|                                 |  |                     |         |                   |   |           |  |                  |         |           |   |                  |  |   |         |  |   |        
|-------------------------------- |  | ------------------- | ------- | ----------------- | - | --------- |  | ---------------- | ------- | --------- | - | ---------------- |  | - | ------- |  | - | -------
|                                 |  | Less Than 12 Months |         | 12 Months or More |   | Total    
|                                 |  | FairValue           |         | UnrealizedLosses  |   | FairValue |  | UnrealizedLosses |         | FairValue |   | UnrealizedLosses
|                                 |  |                     |         |                   |   |          
|June 30, 2010                    |  |                     |         |                   |   |           |  |                  |         |           |   |                  |  |   |         |  |   |        
|Government-sponsored enterprises |  | $                   |        |                   | $ |          |  | $                |        |           | $ |                 |  | $ |        |  | $ |       
|Corporate bonds                  |  |                     |        |                   |   |          |  |                  | 442,000 |           |   | 108,000          |  |   | 442,000 |  |   | 108,000
|                                 |  |                     |         |                   |   |           |  |                  |         |           |   |                  |  |   |         |  |   |        
|                                 |  | $                   |        |                   | $ |          |  | $                | 442,000 |           | $ | 108,000          |  | $ | 442,000 |  | $ | 108,000
|                                 |  |                     |         |                   |   |           |  |                  |         |           |   |                  |  |   |         |  |   |        
|                                 |  |                     |         |                   |   |          
|December 31, 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
|                                 |  |                     |         |                   |   |           |  |                  |         |           |   |                  |  |   |         |  |   |        

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.

The Company had no gross realized gains or losses for the six and
three month periods ended June 30, 2010 and 2009.



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SURREY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 3. EARNINGS PER SHARE

Basic earnings per share for the six and three months ended June 30, 2010 and 2009 were calculated by dividing net income available to common
stockholders by the weighted average number of shares outstanding during the period.

The computation of diluted earnings per 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. The potential dilutive shares are represented by common stock options and by the Series A convertible preferred stock each share of
which is convertible into 2.0868 shares of common stock.

NOTE 4. COMMITMENTS AND LETTERS OF CREDIT

At June 30, 2010, the Company had commitments to extend credit, including unused lines of credit of approximately $36,047,000. Letters of credit
totaling $1,621,652 were outstanding.

NOTE 5. 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, 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.



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SURREY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 5. FAIR VALUE, CONTINUED



Following is a description of valuation methodologies used for assets and liabilities recorded at fair
value.

Investment Securities Available for Sale

Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if
available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the securitys credit rating,
prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active
over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed
securities in less liquid markets.

Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan
losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired,
management measures impairment in accordance with the Receivables Topic of FASB ASC. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation
value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At June 30, 2010, 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.



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SURREY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 5. FAIR VALUE, CONTINUED



Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis.



|                                 |  |       |       |         |   |         |  |         |       |  |   |  
|-------------------------------- |  | ----- | ----- | ------- | - | ------- |  | ------- | ----- |  | - | -
|(in thousands)
June 30, 2010     |  | Total |       | Level 1 |   | Level 2 |  | Level 3
|                                 |  |       |       |        
|Government-sponsored enterprises |  | $     | 1,506 |         | $ |        |  | $       | 1,506 |  | $ | 
|Mortgage-backed securities       |  |       | 82    |         |   |        |  |         | 82    |  |   | 
|Corporate bonds                  |  |       | 442   |         |   |        |  |         | 442   |  |   | 
|                                 |  |       |       |         |   |         |  |         |       |  |   |  
|Total assets at fair value       |  | $     | 2,030 |         | $ |        |  | $       | 2,030 |  | $ | 
|                                 |  |       |       |         |   |         |  |         |       |  |   |  
|                                 |  |       |       |        
|Total liabilities at fair value  |  | $     |      |         | $ |        |  | $       |      |  | $ | 
|                                 |  |       |       |         |   |         |  |         |       |  |   |  
|                                 |  |       |       |        
|(in thousands)
December 31, 2009 |  | Total |       | Level 1 |   | Level 2 |  | Level 3
|                                 |  |       |       |        
|Government-sponsored enterprises |  | $     | 1,505 |         | $ |        |  | $       | 1,505 |  | $ | 
|Mortgage-backed securities       |  |       | 86    |         |   |        |  |         | 86    |  |   | 
|Corporate bonds                  |  |       | 421   |         |   |        |  |         | 421   |  |   | 
|                                 |  |       |       |         |   |         |  |         |       |  |   |  
|Total assets at fair value       |  | $     | 2,012 |         | $ |        |  | $       | 2,012 |  | $ | 
|                                 |  |       |       |         |   |         |  |         |       |  |   |  
|                                 |  |       |       |        
|Total liabilities at fair value  |  | $     |      |         | $ |        |  | $       |      |  | $ | 
|                                 |  |       |       |         |   |         |  |         |       |  |   |  

The Company had no Level 3 assets or liabilities measured at fair
value on a recurring basis at June 30, 2010 or December 31, 2009.

Assets and Liabilities Recorded at Fair Value on a
Nonrecurring Basis

The Company may be required, from time to time, to measure certain assets or liabilities at fair value on a
nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets and liabilities that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets
and liabilities measured at fair value on a nonrecurring basis are included in the table below.



|                                 |  |       |       |         |   |         |  |         |       |  |   |  
|-------------------------------- |  | ----- | ----- | ------- | - | ------- |  | ------- | ----- |  | - | -
|(in thousands)
June 30, 2010     |  | Total |       | Level 1 |   | Level 2 |  | Level 3
|                                 |  |       |       |        
|Loans-commercial and industrial  |  | $     | 3,097 |         | $ |        |  | $       | 3,097 |  | $ | 
|Loans-nonfarm, non-residential   |  |       | 252   |         |   |        |  |         | 252   |  |   | 
|Loans-other                      |  |       | 60    |         |   |        |  |         | 60    |  |   | 
|Foreclosed assets                |  |       | 295   |         |   |        |  |         | 295   |  |   | 
|                                 |  |       |       |         |   |         |  |         |       |  |   |  
|Total assets at fair value       |  | $     | 3,704 |         | $ |        |  | $       | 3,704 |  | $ | 
|                                 |  |       |       |         |   |         |  |         |       |  |   |  
|                                 |  |       |       |        
|Total liabilities at fair value  |  | $     |      |         | $ |        |  | $       |      |  | $ | 
|                                 |  |       |       |         |   |         |  |         |       |  |   |  
|                                 |  |       |       |        
|(in thousands)
December 31, 2009 |  | Total |       | Level 1 |   | Level 2 |  | Level 3
|                                 |  |       |       |        
|Loans-commercial and industrial  |  | $     | 2,790 |         | $ |        |  | $       | 2,790 |  | $ | 
|Loans-nonfarm, non-residential   |  |       | 652   |         |   |        |  |         | 652   |  |   | 
|Loans-other                      |  |       | 393   |         |   |        |  |         | 393   |  |   | 
|Foreclosed assets                |  |       | 53    |         |   |        |  |         | 53    |  |   | 
|                                 |  |       |       |         |   |         |  |         |       |  |   |  
|Total assets at fair value       |  | $     | 3,888 |         | $ |        |  | $       | 3,888 |  | $ | 
|                                 |  |       |       |         |   |         |  |         |       |  |   |  
|                                 |  |       |       |        
|Total liabilities at fair value  |  | $     |      |         | $ |        |  | $       |      |  | $ | 
|                                 |  |       |       |         |   |         |  |         |       |  |   |  

The Company had no Level 3 assets or liabilities measured at fair
value on a nonrecurring basis at June 30, 2010 or December 31, 2009.



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SURREY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 5. FAIR VALUE, CONTINUED



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.

Restricted equity securities:The carrying values of restricted equity securities approximate fair values.

Loans: 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.

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.

Short-term debt: The carrying amount of short-term
debt approximates 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.

Commitments and contingencies:The carrying amount
of commitments and contingencies approximate their fair values.



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SURREY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 5. FAIR VALUE, CONTINUED



Financial Instruments, continued



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



|                                                            |  |                |         |                   |   |                |  |           |         |  |   |        
|----------------------------------------------------------- |  | -------------- | ------- | ----------------- | - | -------------- |  | --------- | ------- |  | - | -------
|                                                            |  | June 30, 2010  |         | December 31, 2009
|                                                            |  | CarryingAmount |         | FairValue         |   | CarryingAmount |  | FairValue
|                                                            |  |                |         |                  
|Financial Assets                                            |  |                |         |                   |   |                |  |           |         |  |   |        
|Cash and due from banks                                     |  | $              | 2,200   |                   | $ | 2,200          |  | $         | 1,924   |  | $ | 1,924  
|Federal funds sold and interest-bearing deposits with banks |  |                | 25,674  |                   |   | 25,674         |  |           | 19,480  |  |   | 19,480 
|Securities, available for sale                              |  |                | 2,030   |                   |   | 2,030          |  |           | 2,012   |  |   | 2,012  
|Restricted equity securities                                |  |                | 1,048   |                   |   | 1,048          |  |           | 1,048   |  |   | 1,048  
|Loans, net of allowance                                     |  |                | 174,713 |                   |   | 174,287        |  |           | 180,442 |  |   | 180,354
|Bank owned life insurance                                   |  |                | 3,229   |                   |   | 3,229          |  |           | 3,173   |  |   | 3,173  
|                                                            |  |                |         |                  
|Financial Liabilities                                       |  |                |         |                   |   |                |  |           |         |  |   |        
|Deposits                                                    |  |                | 177,573 |                   |   | 168,634        |  |           | 173,975 |  |   | 163,638
|Long-term and short-term debt                               |  |                | 9,950   |                   |   | 10,168         |  |           | 12,950  |  |   | 12,953 
|Commitments and contingencies                               |  |                |        |                   |   |               |  |           |        |  |   |       

NOTE 6. SEGMENT
REPORTING

The Company has two reportable segments, the Bank and Freedom Finance, LLC. 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 six months ended June 30, 2010 and 2009 is as follows:



|                              |  |      |             |                     |   |           |                         |  |   |                    |   |  |   |            
|----------------------------- |  | ---- | ----------- | ------------------- | - | --------- | ----------------------- |  | - | ------------------ | - |  | - | -----------
|                              |  | Bank |             | FreedomFinance, LLC |   |           | IntersegmentElimination |  |   | ConsolidatedTotals
|                              |  |      |             |                    
|June 30, 2010                 |  |      |             |                     |   |           |                         |  |   |                    |   |  |   |            
|Net interest income           |  | $    | 4,214,213   |                     | $ | 99,540    |                         |  | $ |                   |   |  | $ | 4,313,753  
|Other income                  |  |      | 1,419,475   |                     |   | 174       |                         |  |   |                   |   |  |   | 1,419,649  
|Depreciation and amortization |  |      | 127,300     |                     |   | 463       |                         |  |   |                   |   |  |   | 127,763    
|Provision for loan losses     |  |      | 1,203,141   |                     |   | 701       |                         |  |   |                   |   |  |   | 1,203,842  
|Net income                    |  |      | 784,379     |                     |   | (3,830    | )                       |  |   |                   |   |  |   | 780,549    
|Assets                        |  |      | 219,241,789 |                     |   | 1,259,703 |                         |  |   | (1,732,460         | ) |  |   | 218,769,032
|                              |  |      |             |                    
|June 30, 2009                 |  |      |             |                     |   |           |                         |  |   |                    |   |  |   |            
|Net interest income           |  | $    | 3,373,615   |                     | $ | 173,334   |                         |  | $ |                   |   |  | $ | 3,546,949  
|Other income                  |  |      | 1,145,905   |                     |   | 1,000,668 |                         |  |   |                   |   |  |   | 2,146,573  
|Depreciation and amortization |  |      | 136,948     |                     |   | 793       |                         |  |   |                   |   |  |   | 137,741    
|Provision for loan losses     |  |      | 678,896     |                     |   | 75,100    |                         |  |   |                   |   |  |   | 753,996    
|Net income                    |  |      | 435,342     |                     |   | 966,477   |                         |  |   |                   |   |  |   | 1,401,819  
|Assets                        |  |      | 205,616,685 |                     |   | 2,454,003 |                         |  |   | (3,592,723         | ) |  |   | 204,477,965

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, requires different technology and marketing strategies.



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##### Table of Contents

SURREY BANCORP

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 6. SEGMENT REPORTING, CONTINUED



The Company 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 June 30, 2010. The Company does allocate
income taxes to the segments. Other income 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 Company does not have
any single external customer from which is derives 10 percent or more of its revenues and operations in any one geographical area.

NOTE 7.
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 $15,762 for the six months ended June 30, 2010, bringing the total Series B and C Preferred Stock investment to $2,022,267. Dividends accrued on the Series B and C Preferred Stock at
June 30, 2010 totaled $13,928, which is included in dividends payable with accrued dividends on the Series A Preferred Stock.

On
April 28, 2010, the shareholders of the Company approved increasing the number of common shares authorized from 5,000,000 to 10,000,000 and on June 9, 2010, the Articles of Incorporation were amended to reflect this.



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##### Table of Contents

|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

Introduction

This discussion, analysis and related financial information are presented to explain the significant factors which affected Surrey Bancorps
financial condition and results of operations for the six and three months ending June 30, 2010 and 2009. This discussion should be read in conjunction with the financial statements and related notes contained within this report.

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

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

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

Highlights

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

Net income available for common stockholders for the three months ended June 30, 2010, was $485,020 or $0.14 per diluted
share outstanding, compared to a $350,793 or $0.11 per diluted share outstanding, for the same period in 2009. Earnings for the three months ended June 30, 2010, are approximately 38.3% higher than for the same period in 2009. The increase
results from an increase in net interest income. Net interest income increased 18.5% from $1,823,276 in the second quarter of 2009 to $2,159,740 in 2010. The lower cost of funds from the second quarter of 2009, compared to the second quarter of 2010
was largely responsible for the margin increase. The cost of funds decreased from 1.87% in the second quarter of 2009 to 1.35% in the second quarter of 2010. Asset yields decreased from 5.46% to 5.32% from 2009 to 2010. However, this decrease was
offset by growth in average earning assets. The provision for loan losses increased from a recapture of $720 in the second quarter of 2009 to $254,485 in the second quarter of 2010. The increase in the loan loss provision results from continued
weakness in the economy that necessitated an increase in reserves associated with impaired loans. Noninterest income increased 7.5% in 2010 primarily due to a gain of $32,865 on the sale of a government guaranteed loan. No such sales were made in
2009. Noninterest expenses decreased 6.5% from $1,750,488 in the second quarter of 2009, to $1,637,115 in 2010. Most of the decrease is associated with decreased FDIC insurance premiums, which decreased from $145,415 in 2009 to $66,399 in 2010. The
FDIC levied a special premium assessment in the second quarter of 2009 which amounted to approximately $90,000. No such assessment was made in 2010.

Net income available for common stockholders for the six months ended June 30, 2010, was $651,736 or $0.20 per diluted share outstanding compared to
$1,274,828 or $0.37 per diluted share outstanding for the same period in 2009. This represents a 48.9% decrease in earnings from the first six months of 2009 to the same period in 2010. This decrease is attributable to earnings from Freedom Finance,
LLC, the Banks sales finance subsidiary, which recorded tax-exempt life insurance proceeds of $1,000,000 in the first quarter of 2009. The proceeds were on the life



18



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##### Table of Contents

|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
|------- | ------------------------------------------------------------------------------------------------



of a former partner of the subsidiary. Excluding the life insurance proceeds, noninterest income increased from $1,146,573 during the six month period ended June 30, 2009 to $1,419,649 or
23.8% in 2010. The increase is primarily due to gains of $244,924 on the sale of a government guaranteed loan. No such sales were made in 2009. Net interest income increased 21.6% from $3,546,949 in the first six months of 2009 to $4,313,753 in
2010. This increase is due to an improvement in the net interest margin driven by a continuing downward repricing of deposits during 2010. The provision for loan losses increased from $753,996 for the six month period ending June 30, 2009 to
$1,203,842 in 2010. The significant increase in the reserve was due to the weakening economy and its effects on credit quality and collateral values. This necessitated an increase in reserves associated with impaired loans. Reserves on impaired
loans increased from approximately $2,132,000 at December 31, 2009 to $3,211,000 at June 30, 2010. The tax-exempt life insurance proceeds reduced the effective income tax rate for the six months ended June 30, 2009, to 10.13%. The
effective income tax rate for the six months ended June 30, 2010 was 36.83%, a 188% increase over 2009.

On June 30, 2010, Surrey
Bancorps assets totaled $218,769,032 compared to $216,949,782 on December 31, 2009. Net loans were $174,712,965 compared to $180,442,154 on December 31, 2009. This decrease was attributable to the sale of the guaranteed portion of a
government guaranteed loan amounting to approximately $4,500,000 and a net increase in the loan loss reserve of approximately $972,000. Otherwise, loan growth remained relatively flat for the six months ended June 30, 2010.

Total deposits on June 30, 2010, were $177,572,680 compared to $173,974,558 at the end of 2009. This increase is primarily attributable to increases
in demand deposits and savings deposits, which include money market accounts. Demand deposits increased 13.54% from 2009 totals, while savings deposits increased 8.86%. Certificates of deposit deceased 4.58% from December 31, 2009 totals.

Common stockholders equity increased by $716,266 or 3.01% during the six months ended June 30, 2010. The increase is comprised of
net income of $780,549, proceeds from exercised stock options of $34,450, other stock based compensation of $14,516, and adjustments to Accumulated Other Comprehensive Income of $15,564. Decreases included the payment and accrual of preferred
dividends $128,813. The net increase resulted in a common stock book value of $7.65 per share, up from $7.44 on December 31, 2009.

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

Preferred stockholders equity increased $15,762 during the period ended June 30, 2010, as detailed in Note 7 to the financial statements.
Combined preferred and common stockholders equity increased $732,028, or 2.58% for the six months ended June 30, 2010.

Financial Condition, Liquidity and Capital Resources

Investments

The
Bank maintains a portfolio of securities as part of its asset/liability and liquidity management programs which emphasize effective yields and maturities to match its needs. The composition of the investment portfolio is examined periodically and
appropriate realignments are initiated to meet liquidity and interest rate sensitivity needs for the Bank.

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. Premiums and discounts are recognized in interest income using the interest method over the
period to maturity or to call dates.

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



19



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|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
|------- | ------------------------------------------------------------------------------------------------



Investments in available for sale securities of $2,030,258 consisted of U.S. Governmental Agency
obligations with maturities ranging from 8 to 26 months, corporate bonds with maturities of 8 years to 8.25 years, that reprice quarterly, and GNMA adjustable rate mortgage securities, which adjust annually.

Loans

Net loans
outstanding on June 30, 2010, were $174,712,965 compared to $180,442,154 on December 31, 2009. The Bank maintains a loan portfolio dominated by real estate and commercial loans diversified among various industries. Approximately 74.1% of
the Banks loans as of June 30, 2010, are fixed rate loans with 25.9% floating with the Banks prime rate or other appropriate internal or external indices.

Deposits

Deposits on June 30, 2010, were $177,572,680, compared to $173,974,558 on December 31, 2009. The June total comes from a base of approximately
12,443 accounts compared to 12,176 accounts at December 31, 2009. Interest-bearing accounts represented 82.7% of June 30, 2010 period end deposits versus 85.8% at December 31, 2009.

Short-term Debt

Short-term debt at June 30, 2010 and December 31, 2009 is as follows:



|                                |  |              |   |                  |   |          
|------------------------------- |  | ------------ | - | ---------------- | - | ---------
|                                |  | June 30,2010 |   | December 31,2009
|Federal Home Loan Bank advances |  | $            |  |                  | $ | 3,750,000
|Payable under secured borrowing |  |              |  |                  |   |         
|                                |  |              |   |                  |   |          
|                                |  | $            |  |                  | $ | 3,750,000
|                                |  |              |   |                  |   |          

During the quarter ended June 30, 2010, amounts payable under
secured borrowings of $1,131,300, which represented proceeds from a transaction involving a loan guaranteed by the SBA, were recorded as a sale. The initial transaction met all the criteria to receive sales treatment under ASC 860 except for the
lapse of the 90-day warranty period for prepayments. Upon the expiration of the warranty period in June 2010, the transaction was recorded as an asset sale with the securing loan and secured borrowing being removed from the balance sheet and the
gain recorded in the income statement.



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##### Table of Contents

|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
|------- | ------------------------------------------------------------------------------------------------



Stockholders Equity

Surrey Bancorp and Surrey Bank & Trust are subject to various regulatory capital requirements administered by federal banking agencies. The
Company and the Bank maintain strong capital positions which exceed all capital adequacy requirements of federal regulatory authorities. The Companys and the Banks capital ratios are presented in the following table.



|                              |  |       |   |  |                                            |  
|----------------------------- |  | ----- | - |  | ------------------------------------------ | -
|                              |  | Ratio |   |  | MinimumRequiredFor CapitalAdequacyPurposes |  
|                              |  |      
|June 30, 2010:                |  |       |   |  |                                            |  
|Total Capital                 |  |       |   |  |                                            |  
|(to Risk-Weighted Assets)     |  |       |   |  |                                            |  
|Surrey Bancorp (Consolidated) |  | 17.75 | % |  | 8.0                                        | %
|Surrey Bank & Trust           |  | 16.91 | % |  | 8.0                                        | %
|Tier I Capital                |  |       |   |  |                                            |  
|(to Risk-Weighted Assets)     |  |       |   |  |                                            |  
|Surrey Bancorp (Consolidated) |  | 16.48 | % |  | 4.0                                        | %
|Surrey Bank & Trust           |  | 15.64 | % |  | 4.0                                        | %
|Tier I Capital                |  |       |   |  |                                            |  
|(to Average Assets)           |  |       |   |  |                                            |  
|Surrey Bancorp (Consolidated) |  | 12.54 | % |  | 4.0                                        | %
|Surrey Bank & Trust           |  | 11.90 | % |  | 4.0                                        | %
|                              |  |      
|December 31, 2009:            |  |       |   |  |                                            |  
|Total Capital                 |  |       |   |  |                                            |  
|(to Risk-Weighted Assets)     |  |       |   |  |                                            |  
|Surrey Bancorp (Consolidated) |  | 17.00 | % |  | 8.0                                        | %
|Surrey Bank & Trust           |  | 16.12 | % |  | 8.0                                        | %
|Tier I Capital                |  |       |   |  |                                            |  
|(to Risk-Weighted Assets)     |  |       |   |  |                                            |  
|Surrey Bancorp (Consolidated) |  | 15.73 | % |  | 4.0                                        | %
|Surrey Bank & Trust           |  | 14.86 | % |  | 4.0                                        | %
|Tier I Capital                |  |       |   |  |                                            |  
|(to Average Assets)           |  |       |   |  |                                            |  
|Surrey Bancorp (Consolidated) |  | 12.50 | % |  | 4.0                                        | %
|Surrey Bank & Trust           |  | 11.80 | % |  | 4.0                                        | %



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##### Table of Contents

|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
|------- | ------------------------------------------------------------------------------------------------



Asset Quality

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

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

The chart below shows the amount of non-performing assets.

Non-Performing Assets to Total Assets:



|                                               |  |              |             |   |                  |   |             |  
|---------------------------------------------- |  | ------------ | ----------- | - | ---------------- | - | ----------- | -
|                                               |  | June 30,2010 |             |   | December 31,2009 |  
|                                               |  |             
|Nonaccrual loans                               |  | $            | 3,472,751   |   |                  | $ | 983,043     |  
|Loans past due 90 days and still accruing      |  |              | 771,552     |   |                  |   | 2,825       |  
|Foreclosed assets                              |  |              | 294,525     |   |                  |   | 53,336      |  
|                                               |  |              |             |   |                  |   |             |  
|Total                                          |  | $            | 4,538,828   |   |                  | $ | 1,039,204   |  
|                                               |  |              |             |   |                  |   |             |  
|Total assets                                   |  | $            | 218,769,032 |   |                  | $ | 216,949,782 |  
|                                               |  |              |             |   |                  |   |             |  
|                                               |  |             
|Ratio of non-performing assets to total assets |  |              | 2.07        | % |                  |   | 0.48        | %

At June 30, 2010, the Bank had loans
totaling $3,472,751 in nonaccrual status. Foreclosed assets at June 30, 2010 primarily include commercial and residential real estate and undeveloped land. Loans that were considered impaired but were still accruing interest at June 30,
2010, including troubled debt restructurings, totaled $6,403,208. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due to the contractual terms of the
loan agreement. Specific reserves on nonaccrual and impaired loans totaled $3,210,750 at quarter end, or 32.5% of the balances outstanding. Government loan guarantees associated with these loans amounted to $3,083,865 at June 30, 2010. Combined
specific reserves and guarantees amount to 63.7% of nonaccrual and impaired loans at June 30, 2010.

Impaired loans (including troubled
debt restructures) still accruing and nonaccrual loans are summarized below:



|                              |  |              |           |                  |   |          
|----------------------------- |  | ------------ | --------- | ---------------- | - | ---------
|                              |  | June 30,2010 |           | December 31,2009
|                              |  |             
|Construction and development  |  | $            | 18,145    |                  | $ | 144,255  
|1-4 family residential        |  |              | 1,047,798 |                  |   | 612,516  
|Nonfarm, nonresidential       |  |              | 1,614,131 |                  |   | 781,797  
|Commercial and industrial     |  |              | 7,172,850 |                  |   | 5,192,563
|Consumer                      |  |              | 17,223    |                  |   | 50,924   
|Other loans                   |  |              | 5,812     |                  |   | 1,060    
|                              |  |              |           |                  |   |          
|Total impaired and nonaccural |  | $            | 9,875,959 |                  | $ | 6,783,115
|                              |  |              |           |                  |   |          

Total troubled debt restructures amounted to $5,113,204 and $384,584
at June 30, 2010 and December 31, 2009, respectively. These troubled debt restructures are primarily commercial and industrial loans.



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##### Table of Contents

|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
|------- | ------------------------------------------------------------------------------------------------



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



|                             |  |               |             |  |                   |   |  |   |             |  |        |  
|---------------------------- |  | ------------- | ----------- |  | ----------------- | - |  | - | ----------- |  | ------ | -
|                             |  | June 30, 2010 |             |  | December 31, 2009 |  
|                             |  |               |             | 
|Construction and development |  | $             | 6,897,511   |  | 3.83              | % |  | $ | 8,044,967   |  | 4.35   | %
|1-4 family residential       |  |               | 46,751,717  |  | 25.93             | % |  |   | 46,355,854  |  | 25.05  | %
|Multi-family                 |  |               | 1,925,541   |  | 1.07              | % |  |   | 2,005,142   |  | 1.08   | %
|Farmland                     |  |               | 2,710,355   |  | 1.50              | % |  |   | 2,458,748   |  | 1.33   | %
|Nonfarm, non-residential     |  |               | 46,438,718  |  | 25.76             | % |  |   | 51,527,856  |  | 27.84  | %
|                             |  |               |             |  |                   |   |  |   |             |  |        |  
|Total real estate            |  |               | 104,723,842 |  | 58.09             | % |  |   | 110,392,567 |  | 59.65  | %
|                             |  |               |             | 
|Commercial and industrial    |  |               | 68,522,853  |  | 38.01             | % |  |   | 67,428,438  |  | 36.44  | %
|Consumer                     |  |               | 7,038,277   |  | 3.90              | % |  |   | 7,085,464   |  | 3.83   | %
|Other loans                  |  |               | 773         |  |                  | % |  |   | 155,653     |  | 0.08   | %
|                             |  |               |             |  |                   |   |  |   |             |  |        |  
|Total loans                  |  | $             | 180,285,745 |  | 100.00            | % |  | $ | 185,062,122 |  | 100.00 | %
|                             |  |               |             |  |                   |   |  |   |             |  |        |  

The concentrations represented above do not, based on managements assessment, expose the Bank to any unusual
concentration risk. Based on the Banks size the only concentration that is above area peer group analysis is commercial and industrial loans. Management recognizes the inherent risk associated with commercial lending, including whether or not
a borrowers actual results of operations will correspond to those projected by the borrower when the loan was funded; economic factors such as the number of housing starts and increases in interest rates, etc.; depression of collateral values;
and completion of projects within the original cost and time estimates. The Bank mitigates some of that risk by actively seeking government guarantees on these loans. Collectively, the Bank has approximately $41,649,000 in loans that carry
government guarantees. The guaranteed portion of these loans amounts to $32,623,000 at June 30, 2010. Loan guarantees by loan class are below:



|                             |  |               |             |                    |   |            |  |       |  
|---------------------------- |  | ------------- | ----------- | ------------------ | - | ---------- |  | ----- | -
|                             |  | June 
30,2010 |             | Guaranteed Portion |  
|                             |  | Amount        |             | Percentage         |  
|                             |  |               |            
|Construction and development |  | $             | 6,897,511   |                    | $ |           |  | 0.00  | %
|1-4 family residential       |  |               | 46,751,717  |                    |   | 1,152,345  |  | 2.46  | %
|Multi-family                 |  |               | 1,925,541   |                    |   | 38,902     |  | 2.02  | %
|Farmland                     |  |               | 2,710,355   |                    |   | 582,315    |  | 21.48 | %
|Nonfarm, non-residential     |  |               | 46,438,718  |                    |   | 14,427,701 |  | 31.07 | %
|                             |  |               |             |                    |   |            |  |       |  
|Total real estate            |  |               | 104,723,842 |                    |   | 16,201,263 |  | 15.47 | %
|                             |  |               |            
|Commercial and industrial    |  |               | 68,522,853  |                    |   | 16,422,198 |  | 23.97 | %
|Consumer                     |  |               | 7,038,277   |                    |   |           |  | 0.00  | %
|Other loans                  |  |               | 773         |                    |   |           |  | 0.00  | %
|                             |  |               |             |                    |   |            |  |       |  
|Total loans                  |  | $             | 180,285,745 |                    | $ | 32,623,461 |  | 18.10 | %
|                             |  |               |             |                    |   |            |  |       |  

Loans in higher risk categories, such as non-owner occupied nonfarm, non-residential property and commercial real estate
construction represent a small segment of our loan portfolio. Commercial construction loans included in construction and development loans amounted to $2,286,785 at June 30, 2010. Non-owner occupied nonfarm, non-residential properties included
in nonfarm, non-residential loans above amounted to $11,755,995 at June 30, 2010.



23



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##### Table of Contents

|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
|------- | ------------------------------------------------------------------------------------------------



The consolidated provision for loan losses charged to operations was $1,203,842 in the first six months
of 2010 compared to $753,996 for the same period in 2009. The provision attributable to the Bank increased from $678,896 in 2009 to $1,203,141 in 2010. This increase is primarily attributable to increases in reserves on impaired loans. The increased
reserves on impaired loans primarily resulted from the deterioration of the debtors collateral bases on specific loans during the first six months of 2010. These collateral bases include inventory and accounts receivable, among other operating
assets. Reserves for nonaccrual and impaired loans at June 30, 2010 amounted to $3,210,750, compared to $2,132,474 at December 31, 2009. The provision attributable to Freedom Finance, LLC decreased from $75,100 in 2009 to $701 for the six
months ended June 30, 2010. The decrease in the Freedom Finance, LLC provision was due to a decreasing loan base. Loan balances in the finance subsidiary decreased from $1,063,311 at December 31, 2009 to $831,372 at the end of June 2010.
The notes to the consolidated financial statements contained within this report provide details of the activity in the allowance for loan losses.

The reserve for loan losses at June 30, 2010 was $5,642,987 or 3.13% of period end loans. This percentage is derived from total loans. Approximately
$41,649,000 of the total loans outstanding at June 30, 2010 are government guaranteed loans for which the Banks exposure ranges from 10% to 49% of the outstanding balance. When the guaranteed portions of the loans are removed from the
equation, the loan loss reserve is approximately 3.81% of outstanding loans.

The level of reserve is established based upon managements
evaluation of historical loss data and the effects of certain economic environmental factors on the loan portfolio. The historical loss portion of the reserve is computed using the average loss data from the past three years applied to its
corresponding category of loans. However, historical losses only reflect a small portion of the Banks loan loss reserve. The environmental factors represent risk from external economic influences on the credit quality of the loan portfolio.
These factors include the movement of interest rates, unemployment rates, past due and charge off trends, loan grading migrations, movement in collateral values and the Banks exposure to certain loan concentrations. Positive or negative
movements in any of these factors have an effect on the credit quality of the loan portfolio. As a result, management continues to actively monitor the Banks asset quality affected by these environmental factors. The following table is a
summary of loans past due at June 30, 2010 and December 31, 2009.



|                             |  |               |           |   |                   |   |         |            |  |   |              |   |  |   |       |  
|---------------------------- |  | ------------- | --------- | - | ----------------- | - | ------- | ---------- |  | - | ------------ | - |  | - | ----- | -
|                             |  | June 30, 2010 |           |   | December 31, 2009 |  
|                             |  | 30-89 Days    |           |   | 90 Days Plus      |   |         | 30-89 Days |  |   | 90 Days Plus |  
|                             |  |               |           |  
|Construction and development |  | $             | 10,067    |   |                   | $ |        |            |  | $ | 257,318      |   |  | $ |      |  
|1-4 family residential       |  |               | 517,814   |   |                   |   |        |            |  |   | 580,428      |   |  |   |      |  
|Nonfarm, non-residential     |  |               | 659,179   |   |                   |   | 4,593   |            |  |   | 353,239      |   |  |   |      |  
|Commercial and industrial    |  |               | 438,279   |   |                   |   | 763,119 |            |  |   | 429,361      |   |  |   |      |  
|Consumer                     |  |               | 165,860   |   |                   |   | 3,839   |            |  |   | 106,873      |   |  |   | 2,825 |  
|Other loans                  |  |               |          |   |                   |   |        |            |  |   | 7,243        |   |  |   |      |  
|                             |  |               |           |   |                   |   |         |            |  |   |              |   |  |   |       |  
|                             |  | $             | 1,791,199 |   |                   | $ | 771,551 |            |  | $ | 1,734,462    |   |  | $ | 2,825 |  
|                             |  |               |           |   |                   |   |         |            |  |   |              |   |  |   |       |  
|                             |  |               |           |  
|Percentage total loans       |  |               | 0.99      | % |                   |   | 0.43    | %          |  |   | 0.94         | % |  |   | 0.00  | %
|                             |  |               |           |   |                   |   |         |            |  |   |              |   |  |   |       |  

Past due loans are reviewed weekly and collection efforts assessed to determine potential problems arising in the loan
portfolio. Proactive monitoring of past due accounts allows management to anticipate trends within the portfolio and make appropriate adjustments to collection efforts and to the allowance for loan losses. Collectively, past dues increased from
December 31, 2009 to June 30, 2010. The largest increase was in commercial and industrial loans. The increase is primarily attributable to two customers. Overall, past dues increased approximately 48 percent from the end of 2009 to
June 30, 2010.

Management believes that its loan portfolio is diversified so that a downturn in a particular market or industry will not
have a significant impact on the loan portfolio or the Banks financial condition. Management believes that its provision and reserve offer an adequate allowance for loan losses and provide an appropriate reserve for the loan portfolio.

The Bank lends primarily in Surry County, North Carolina and Patrick Country, Virginia and surrounding counties.



24



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##### Table of Contents

|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED
|------- | ------------------------------------------------------------------------------------------------



Interest Rate Sensitivity and Liquidity

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

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

At June 30, 2010, the liquidity position of the Company was
good, in managements opinion with short-term liquid assets of $27,873,718. Deposit increases and proceeds from the sale of government guaranteed loans primarily accounted for the net increase in liquidity from December 31, 2009 totals. To
provide supplemental liquidity, the Bank has six unsecured lines of credit with correspondent banks totaling $19,000,000. At June 30, 2010, there were no advances against these lines. Additionally, the Bank has a secured borrowing arrangement
with the Federal Home Loan Bank (FHLB). The maximum credit available under this agreement approximates $14,756,000 of which $9,950,000 of advances had been taken down at June 30, 2010.



25



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##### Table of Contents

|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

Not Applicable as a Smaller Reporting Company.



26



---

##### Table of Contents

|ITEM 4. | CONTROLS & PROCEDURES
|------- | ---------------------

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



27



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##### Table of Contents

PART II  OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

None



|Item 1A. | Risk Factors
|-------- | ------------

Not Applicable as
a Smaller Reporting Company.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

None



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

Not Applicable



|Item 4. | (Removed and Reserved)
|------- | ----------------------



|Item 5. | Other Information
|------- | -----------------

None



|Item 6. | Exhibits
|------- | --------



|     |  |                                                                                               
|---- |  | ----------------------------------------------------------------------------------------------
|31.1 |  | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes Oxley Act
|     | 
|31.2 |  | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes Oxley Act
|     | 
|32.1 |  | Certification of PEO/PFO Pursuant to Section 906 of the Sarbanes Oxley Act                    



28



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##### Table of Contents

SIGNATURES

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



|                      |  |  |  |                                               
|--------------------- |  |  |  | ----------------------------------------------
|                      |  |  |  | Surrey Bancorp                                
|                      |  | 
|Date: August 11, 2010 |  |  |  | /s/ Edward C. Ashby, III                      
|                      |  |  |  | Edward C. Ashby, III                          
|                      |  |  |  | President and Chief Executive Officer         
|                      |  |  |  | (Principal Executive Officer)                 
|                      |  | 
|Date: August 11, 2010 |  |  |  | /s/ Mark H. Towe                              
|                      |  |  |  | Mark H. Towe                                  
|                      |  |  |  | Sr. Vice President and Chief Financial Officer
|                      |  |  |  | (Principal Financial Officer)                 



29