##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-QSB



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



For the quarterly period ended March 31, 2004



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



For the transition period from  to



COMMISSION FILE NUMBER 0000-50313



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SURREY BANCORP

(Exact name of small business issuer as specified in its charter)



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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|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

(Issuers telephone number)



Not Applicable

(Former name, former address and former fiscal year, if changed since last report)



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Check whether the issuer (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 reqistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈



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



On April 30, 2004, there were 1,196,407 common shares issued and outstanding



Transitional Small Business Disclosure Format (Check
one):    Yes ̈No  x



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##### Table of Contents

|                                                                                                                   |  |      
|------------------------------------------------------------------------------------------------------------------ |  | -----
|                                                                                                                   | 
|PART I  FINANCIAL INFORMATION                                                                                     |  |      
|                                                                                                                   | 
|Item 1. Consolidated Financial Statements                                                                          |  |      
|                                                                                                                   | 
|Consolidated Balance Sheets March 31, 2004 (Unaudited) and December 31, 2003                                       |  | 3    
|                                                                                                                   | 
|Consolidated Statements of Income, Three Months Ended March 31, 2004 and 2003 (Unaudited)                          |  | 4    
|                                                                                                                   | 
|Consolidated Statements of Cash Flows, Three Months Ended March 31, 2004 and 2003 (Unaudited)                      |  | 5    
|                                                                                                                   | 
|Consolidated Statements of Changes in Stockholders Equity, Three Months Ended March 31, 2004 and 2003 (Unaudited) |  | 6    
|                                                                                                                   | 
|Notes to Consolidated Financial Statements                                                                         |  | 7-10 
|                                                                                                                   | 
|Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations                      |  | 11-14
|                                                                                                                   | 
|Item 3.
Controls and Procedures                                                                                    |  | 15   
|                                                                                                                   | 
|PART II  OTHER INFORMATION                                                                                        |  | 16   
|                                                                                                                   | 
|SIGNATURES                                                                                                         |  |      



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##### Table of Contents

Consolidated Balance Sheets



|                                                                                                                 |  |            |             |               |   |            
|---------------------------------------------------------------------------------------------------------------- |  | ---------- | ----------- | ------------- | - | -----------
|                                                                                                                 |  | Unaudited  |             | Audited      
|                                                                                                                 |  | March 2004 |             | December 2003
|Assets                                                                                                           |  |            |             |               |   |            
|Cash and due from banks                                                                                          |  | $          | 1,829,694   |               | $ | 1,956,473  
|Interest-bearing deposits with banks                                                                             |  |            | 9,898,921   |               |   | 4,068,017  
|Investment securities available for sale                                                                         |  |            | 3,812,065   |               |   | 5,425,973  
|Federal Home Loan Bank stock, at cost                                                                            |  |            | 407,500     |               |   | 445,000    
|Loans, net of allowance of loan losses of $2,122,068 in 2004 and $2,109,820 in 2003                              |  |            | 123,027,827 |               |   | 117,362,619
|Property and equipment, net                                                                                      |  |            | 4,213,550   |               |   | 4,281,770  
|Accrued income                                                                                                   |  |            | 586,026     |               |   | 585,608    
|Goodwill, net of amortization                                                                                    |  |            | 120,000     |               |   | 120,000    
|Other assets                                                                                                     |  |            | 815,462     |               |   | 831,545    
|                                                                                                                 |  |            |             |               |   |            
|                                                                                                                 |  | $          | 144,711,045 |               | $ | 135,077,005
|                                                                                                                 |  |            |             |               |   |            
|Liabilities and Stockholders Equity                                                                             |  |            |             |               |   |            
|                                                                                                                 |  |           
|Liabilities:                                                                                                     |  |            |             |               |   |            
|Deposits:                                                                                                        |  |            |             |               |   |            
|Noninterest-bearing                                                                                              |  | $          | 15,781,626  |               | $ | 16,159,584 
|Interest-bearing                                                                                                 |  |            | 105,039,930 |               |   | 95,118,292 
|                                                                                                                 |  |            |             |               |   |            
|Total deposits                                                                                                   |  |            | 120,821,556 |               |   | 111,277,876
|                                                                                                                 |  |           
|Federal funds purchased and securities sold under agreements to repurchase                                       |  |            | 1,252,852   |               |   | 3,418,635  
|Short-term debt                                                                                                  |  |            | 1,400,000   |               |   | 1,400,000  
|Long-term debt                                                                                                   |  |            | 6,854,036   |               |   | 5,246,080  
|Dividends payable on preferred stock                                                                             |  |            | 29,652      |               |   | 30,070     
|Accrued interest payable                                                                                         |  |            | 165,545     |               |   | 129,193    
|Other liabilities                                                                                                |  |            | 574,920     |               |   | 501,685    
|                                                                                                                 |  |            |             |               |   |            
|                                                                                                                 |  |            | 131,098,561 |               |   | 122,003,539
|                                                                                                                 |  |            |             |               |   |            
|Commitments and contingencies                                                                                    |  |            |             |               |   |            
|                                                                                                                 |  |           
|Stockholders equity:                                                                                            |  |            |             |               |   |            
|Preferred stock, no par value; 1,000,000 shares authorized; 189,356 shares issued                                |  |            | 2,620,325   |               |   | 2,620,325  
|Common stock, no par value; 5,000,000 shares authorized; 1,196,407 shares issued in 2004, and 1,170,189 in 2003. |  |            | 7,974,565   |               |   | 7,822,387  
|Additional paid in capital                                                                                       |  |            |            |               |   |           
|Retained earnings                                                                                                |  |            | 3,010,162   |               |   | 2,627,529  
|Accumulated other comprehensive Income                                                                           |  |            | 7,432       |               |   | 3,225      
|                                                                                                                 |  |            |             |               |   |            
|                                                                                                                 |  |            | 13,612,484  |               |   | 13,073,466 
|                                                                                                                 |  |            |             |               |   |            
|                                                                                                                 |  | $          | 144,711,045 |               | $ | 135,077,005
|                                                                                                                 |  |            |             |               |   |            



See Notes to Consolidated
Financial Statements



3



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##### Table of Contents

Consolidated Statements of Income

Three months ended March 31, 2004 and 2003



|                                                    |  |                              |           |   |           |   |          
|--------------------------------------------------- |  | ---------------------------- | --------- | - | --------- | - | ---------
|                                                    |  |                              |           |   | Unaudited
|                                                    |  | Three months ended March 31,
|                                                    |  | 2004                         |           |   | 2003     
|Interest income:                                    |  |                              |           |   |           |   |          
|Loans and fees on loans                             |  | $                            | 1,960,933 |   |           | $ | 1,679,633
|Federal funds sold                                  |  |                              |          |   |           |   |         
|Investment securities, taxable                      |  |                              | 22,604    |   |           |   | 21,981   
|Investment securities, non taxable                  |  |                              | 456       |   |           |   | 683      
|Deposits with banks                                 |  |                              | 3,977     |   |           |   | 13,353   
|                                                    |  |                              |           |   |           |   |          
|                                                    |  |                              | 1,987,970 |   |           |   | 1,715,650
|                                                    |  |                              |           |   |           |   |          
|Interest expense:                                   |  |                              |           |   |           |   |          
|Deposits                                            |  |                              | 459,723   |   |           |   | 457,834  
|Federal funds purchased                             |  |                              | 1,697     |   |           |   | 145      
|Securities sold under agreements to repurchase      |  |                              | 762       |   |           |   | 1,148    
|Short-term borrowings                               |  |                              | 4,035     |   |           |   | 4,831    
|Long-term borrowings                                |  |                              | 50,401    |   |           |   | 51,099   
|                                                    |  |                              |           |   |           |   |          
|                                                    |  |                              | 516,618   |   |           |   | 515,057  
|                                                    |  |                              |           |   |           |   |          
|Net interest income                                 |  |                              | 1,471,352 |   |           |   | 1,200,593
|                                                    |  |                             
|Provision for loan losses                           |  |                              | 85,159    |   |           |   | 147,084  
|                                                    |  |                              |           |   |           |   |          
|Net interest income after provision for loan losses |  |                              | 1,386,193 |   |           |   | 1,053,509
|                                                    |  |                              |           |   |           |   |          
|Noninterest income:                                 |  |                              |           |   |           |   |          
|Service charges on deposit accounts                 |  |                              | 216,345   |   |           |   | 188,895  
|Other service charges and fees                      |  |                              | 129,143   |   |           |   | 49,559   
|Other operating income                              |  |                              | 147,274   |   |           |   | 226,854  
|                                                    |  |                              |           |   |           |   |          
|                                                    |  |                              | 492,762   |   |           |   | 465,308  
|                                                    |  |                              |           |   |           |   |          
|Noninterest expense:                                |  |                              |           |   |           |   |          
|Salaries and employee benefits                      |  |                              | 636,879   |   |           |   | 497,914  
|Occupancy expense                                   |  |                              | 80,164    |   |           |   | 55,271   
|Equipment expense                                   |  |                              | 113,517   |   |           |   | 82,202   
|Data processing                                     |  |                              | 91,435    |   |           |   | 62,664   
|Other expense                                       |  |                              | 286,375   |   |           |   | 282,644  
|                                                    |  |                              |           |   |           |   |          
|                                                    |  |                              | 1,208,370 |   |           |   | 980,695  
|                                                    |  |                              |           |   |           |   |          
|Net income before income taxes                      |  |                              | 670,585   |   |           |   | 538,122  
|                                                    |  |                             
|Income tax expense                                  |  |                              | 258,300   |   |           |   | 207,800  
|                                                    |  |                              |           |   |           |   |          
|Net income                                          |  |                              | 412,285   |   |           |   | 330,322  
|                                                    |  |                             
|Preferred stock dividend declared                   |  |                              | (29,652   | ) |           |   |         
|                                                    |  |                              |           |   |           |   |          
|Net income available for common stockholders        |  | $                            | 382,633   |   |           | $ | 330,322  
|                                                    |  |                              |           |   |           |   |          
|Basic earnings per share                            |  | $                            | 0.32      |   |           | $ | 0.28     
|                                                    |  |                              |           |   |           |   |          
|Diluted earnings per share                          |  | $                            | 0.29      |   |           | $ | 0.27     
|                                                    |  |                              |           |   |           |   |          
|Basic weighted shares outstanding                   |  |                              | 1,181,010 |   |           |   | 1,150,051
|                                                    |  |                              |           |   |           |   |          
|Diluted weighted shares outstanding                 |  |                              | 1,441,147 |   |           |   | 1,237,224
|                                                    |  |                              |           |   |           |   |          



See Notes to Consolidated
Financial Statements



4



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##### Table of Contents

Consolidated Statements of Cash Flows

Three months ended March 31, 2004 and 2003



|                                                                                                  |  |                              |            |   |           |   |            |  
|------------------------------------------------------------------------------------------------- |  | ---------------------------- | ---------- | - | --------- | - | ---------- | -
|                                                                                                  |  |                              |            |   | Unaudited |  
|                                                                                                  |  | Three months ended March 31, |           
|                                                                                                  |  | 2004                         |            |   | 2003      |  
|Cash flows from operating activities:                                                             |  |                              |            |   |           |   |            |  
|Net income                                                                                        |  | $                            | 412,285    |   |           | $ | 330,322    |  
|Adjustments to reconcile net income to net cash provided (used) by operations:                    |  |                              |            |   |           |   |            |  
|Depreciation and amortization                                                                     |  |                              | 97,547     |   |           |   | 80,851     |  
|Provision for loan losses                                                                         |  |                              | 85,159     |   |           |   | 147,084    |  
|Accretion of discount on securities, net of amortization of premiums                              |  |                              | (2,866     | ) |           |   | 5,566      |  
|Changes in assets and liabilities:                                                                |  |                              |            |   |           |   |            |  
|Accrued income                                                                                    |  |                              | (418       | ) |           |   | 26,995     |  
|Loans held for sale                                                                               |  |                              |           |   |           |   | (6,248,962 | )
|Other assets                                                                                      |  |                              | 13,444     |   |           |   | (54,307    | )
|Accrued interest payable                                                                          |  |                              | 36,352     |   |           |   | 28,802     |  
|Other liabilities                                                                                 |  |                              | 73,235     |   |           |   | (288,317   | )
|                                                                                                  |  |                              |            |   |           |   |            |  
|Net cash provided (used) by operating activities                                                  |  |                              | 714,738    |   |           |   | (5,971,966 | )
|                                                                                                  |  |                              |            |   |           |   |            |  
|Cash flows from investing activities:                                                             |  |                              |            |   |           |   |            |  
|Net decrease (increase) in interest-bearing deposits with banks                                   |  |                              | (5,830,904 | ) |           |   | 4,047,327  |  
|Purchase of investment securities                                                                 |  |                              | (1,497,376 | ) |           |   | (499,208   | )
|Sales and maturities of investment securities                                                     |  |                              | 3,120,996  |   |           |   | 1,548,740  |  
|Purchase (redemption) of Federal Home Loan Bank stock                                             |  |                              | 37,500     |   |           |   | (7,500     | )
|Net increase in loans                                                                             |  |                              | (5,750,367 | ) |           |   | (2,591,119 | )
|Purchases of property and equipment                                                               |  |                              | (29,327    | ) |           |   | (45,766    | )
|                                                                                                  |  |                              |            |   |           |   |            |  
|Net cash used in investing activities                                                             |  |                              | (9,949,478 | ) |           |   | 2,452,474  |  
|                                                                                                  |  |                              |            |   |           |   |            |  
|Cash flows from financing activities:                                                             |  |                              |            |   |           |   |            |  
|Net increase in deposits                                                                          |  |                              | 9,543,680  |   |           |   | 3,945,873  |  
|Net decrease (increase) in fed funds purchased and securities sold under agreements to repurchase |  |                              | (2,165,783 | ) |           |   | (451,307   | )
|Net (decrease) increase in long-term debt                                                         |  |                              | 1,607,956  |   |           |   | (441,887   | )
|Dividends paid on preferred stock                                                                 |  |                              | (30,070    | ) |           |   |           |  
|Proceeds from sale of common stock                                                                |  |                              | 152,178    |   |           |   |           |  
|                                                                                                  |  |                              |            |   |           |   |            |  
|Net cash provided by financing activities                                                         |  |                              | 9,107,961  |   |           |   | 3,052,679  |  
|                                                                                                  |  |                              |            |   |           |   |            |  
|Net increase (decrease) in cash and cash equivalents                                              |  |                              | (126,779   | ) |           |   | (466,813   | )
|                                                                                                  |  |                             
|Cash and cash equivalents, beginning                                                              |  |                              | 1,956,473  |   |           |   | 1,409,407  |  
|                                                                                                  |  |                              |            |   |           |   |            |  
|Cash and cash equivalents, ending                                                                 |  | $                            | 1,829,694  |   |           | $ | 942,594    |  
|                                                                                                  |  |                              |            |   |           |   |            |  
|Supplemental disclosure of cash flow information:                                                 |  |                              |            |   |           |   |            |  
|Interest paid                                                                                     |  | $                            | 480,266    |   |           | $ | 486,255    |  
|                                                                                                  |  |                              |            |   |           |   |            |  
|Taxes paid                                                                                        |  | $                            | 27,832     |   |           | $ | 403,045    |  
|                                                                                                  |  |                              |            |   |           |   |            |  
|Supplemental disclosure of Non-cash transactions:                                                 |  |                              |            |   |           |   |            |  
|                                                                                                  |  |                             
|Non-cash transactions related to acquisition of minority interest in subsidiary:                  |  |                              |            |   |           |   |            |  
|Cancellation of loan and interest receivable                                                      |  | $                            |           |   |           | $ | 422,984    |  
|Cancellation of loans receivable from recourse obligations                                        |  |                              |           |   |           |   | 243,850    |  
|Addition to allowance for loan losses                                                             |  |                              |           |   |           |   | 57,852     |  
|                                                                                                  |  |                              |            |   |           |   |            |  
|Total transaction                                                                                 |  | $                            |           |   |           | $ | 724,686    |  
|                                                                                                  |  |                              |            |   |           |   |            |  



See Notes to Consolidated Financial Statements



5



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##### Table of Contents

Consolidated Statements of Changes in Stockholders Equity

Three months ended March 31, 2004
and 2003



|                                                                                                                 |        |                             |        |              |           |                            |           |                   |   |           |                                                      |   |           |       |   |           |   |           |   |        |   |  |   |            |  
|---------------------------------------------------------------------------------------------------------------- | ------ | --------------------------- | ------ | ------------ | --------- | -------------------------- | --------- | ----------------- | - | --------- | ---------------------------------------------------- | - | --------- | ----- | - | --------- | - | --------- | - | ------ | - |  | - | ---------- | -
|                                                                                                                 |        |                             |        |              |           |                            |           |                   |   |           |                                                      |   |           |       |   |           |   | Unaudited |  
|                                                                                                                 |        | Convertible Preferred Stock |        | Common Stock |           | Additional Paid in Capital |           | Retained Earnings |   |           | Unrealized Appreciation (Depreciation) on Securities |   |           | Total |  
|                                                                                                                 | Shares |                             | Amount |              | Shares    |                            | Amount    |                   |   |           |                                                     
|Balance January 1, 2003                                                                                          |        |                            |        | $            |          |                            | 958,376   |                   | $ | 3,833,504 |                                                      | $ | 3,879,760 |       | $ | 1,432,493 |   |           | $ | 18,629 |   |  | $ | 9,164,386  |  
|                                                                                                                 |        |                             |        |              |           |                            |           |                  
|Comprehensive income                                                                                             |        |                             |        |              |           |                            |           |                   |   |           |                                                      |   |           |       |   |           |   |           |   |        |   |  |   |            |  
|Net income                                                                                                       |        |                             |        |              |           |                            |           |                   |   |           |                                                      |   |           |       |   | 330,322   |   |           |   |        |   |  |   | 330,322    |  
|Net change in unrealized appreciation on investment securities available for sale, net of income taxes of $1,305 |        |                             |        |              |           |                            |           |                   |   |           |                                                      |   |           |       |   |           |   |           |   | (2,071 | ) |  |   | (2,071     | )
|                                                                                                                 |        |                             |        |              |           |                            |           |                   |   |           |                                                      |   |           |       |   |           |   |           |   |        |   |  |   |            |  
|Total comprehensive income                                                                                       |        |                             |        |              |           |                            |           |                   |   |           |                                                      |   |           |       |   |           |   |           |   |        |   |  |   | 328,251    |  
|                                                                                                                 |        |                             |        |              |           |                            |           |                   |   |           |                                                      |   |           |       |   |           |   |           |   |        |   |  |   |            |  
|Balance, March 31, 2003                                                                                          |        |                            |        | $            |          |                            | 958,376   |                   | $ | 3,833,504 |                                                      | $ | 3,879,760 |       | $ | 1,762,815 |   |           | $ | 16,558 |   |  | $ | 9,492,637  |  
|                                                                                                                 |        |                             |        |              |           |                            |           |                   |   |           |                                                      |   |           |       |   |           |   |           |   |        |   |  |   |            |  
|Balance January 1, 2004                                                                                          |        | 189356                      |        |              | 2,620,325 |                            | 1,170,189 |                   | $ | 7,822,387 |                                                      | $ | 0         |       | $ | 2,627,529 |   |           | $ | 3,225  |   |  | $ | 13,073,466 |  
|                                                                                                                 |        |                             |        |              |           |                            |           |                  
|Comprehensive income                                                                                             |        |                             |        |              |           |                            |           |                   |   |           |                                                      |   |           |       |   |           |   |           |   |        |   |  |   |            |  
|Net income                                                                                                       |        |                             |        |              |           |                            |           |                   |   |           |                                                      |   |           |       |   | 412,285   |   |           |   |        |   |  |   | 412,285    |  
|Net change in unrealized appreciation on investment securities available for sale, net of income taxes of $2,639 |        |                             |        |              |           |                            |           |                   |   |           |                                                      |   |           |       |   |           |   |           |   | 4,207  |   |  |   | 4,207      |  
|                                                                                                                 |        |                             |        |              |           |                            |           |                   |   |           |                                                      |   |           |       |   |           |   |           |   |        |   |  |   |            |  
|Total comprehensive income                                                                                       |        |                             |        |              |           |                            |           |                   |   |           |                                                      |   |           |       |   |           |   |           |   |        |   |  |   | 416,492    |  
|                                                                                                                 |        |                             |        |              |           |                            |           |                  
|Common stock issued                                                                                              |        |                             |        |              |           |                            |           |                   |   |           |                                                      |   |           |       |   |           |   |           |   |        |   |  |   |            |  
|Common stock options exercised                                                                                   |        |                             |        |              |           |                            | 26,218    |                   |   | 152,178   |                                                      |   |           |       |   |           |   |           |   |        |   |  |   | 152,178    |  
|Dividends declared on convertible preferred stock                                                                |        |                             |        |              |           |                            |           |                   |   |           |                                                      |   |           |       |   | (29,652   | ) |           |   |        |   |  |   | (29,652    | )
|                                                                                                                 |        |                             |        |              |           |                            |           |                   |   |           |                                                      |   |           |       |   |           |   |           |   |        |   |  |   |            |  
|Balance, March 31, 2004                                                                                          |        | 189,356                     |        | $            | 2,620,325 |                            | 1,196,407 |                   | $ | 7,974,565 |                                                      | $ | 0         |       | $ | 3,010,162 |   |           | $ | 7,432  |   |  | $ | 13,612,484 |  
|                                                                                                                 |        |                             |        |              |           |                            |           |                   |   |           |                                                      |   |           |       |   |           |   |           |   |        |   |  |   |            |  



6



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##### Table of Contents

SURREY BANCORP

NOTES TO FINANCIAL STATEMENTS



NOTE 1. BASIS OF PRESENTATION



The accompanying unaudited financial statements were prepared in accordance with
instructions for Form 10-QSB 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 financial statements contain all
adjustments necessary to present fairly the financial condition of Surrey Bancorp as of March 31, 2004 and December 31, 2003, the results of operations for the three months ended March 31, 2004 and 2003, and its cash flows for the three months ended
March 31, 2004 and 2003. The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results expected for the full year.



ORGANIZATION



Surrey Bancorp (the Company) began operation on May 1, 2003 and was created for the purpose of acquiring all the outstanding shares of common stock of Surrey
Bank & Trust. Shareholders of the bank received six shares of Surrey Bancorp common stock for every five shares of Surrey Bank & Trust common stock owned.



Surrey Bank & Trust (Bank) was organized and incorporated under the laws of the State of North Carolina on July 15 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 Friendly Finance, LLC., a subsidiary operation specializing in the purchase of sales finance contracts from local automobile dealers. The Bank originally had a 60%
majority interest in the company. On March 1, 2003 the Bank acquired the minority interest in Friendly Finance, LLC in exchange for the satisfaction of other commitments of the holder of the minority interest.



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



PRESENTATION OF CASH FLOWS



For purposes of reporting cash flows, cash and due from banks 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. Cash flows from demand deposits, NOW accounts and savings accounts
are reported net since their original maturities are less than three months. Loans and time deposits are reported net per FASB Statement No. 104. Federal Funds purchased are shown separately.



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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.



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 March 31, 2004 and December 31, 2003, the Bank had no investments classified as held to maturity.



Loans Held for Sale



Mortgage loans originated and intended for sale in the secondary market are carried at the
lower of cost or estimated market value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income. At March 31, 2004 and December 31, 2003, the Bank had no loans classified as available for sale.



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.



Activity in the allowance for loan losses for the three months ended March 31, 2004 and 2003 follows:



|                                                                 |  |           |           |   |      |   |           |  
|---------------------------------------------------------------- |  | --------- | --------- | - | ---- | - | --------- | -
|                                                                 |  | March 31, |          
|                                                                 |  | 2004      |           |   | 2003 |  
|Balance at beginning of year                                     |  | $         | 2,109,820 |   |      | $ | 1,831,167 |  
|Add provision charged to expense                                 |  |           | 85,159    |   |      |   | 147,084   |  
|Less net charge-offs                                             |  |           | (72,911   | ) |      |   | (22,354   | )
|Allowance applicable to the acquisition of the minority interest |  |           |          |   |      |   | 58,000    |  
|                                                                 |  |           |           |   |      |   |           |  
|                                                                 |  | $         | 2,122,068 |   |      | $ | 2,013,897 |  
|                                                                 |  |           |           |   |      |   |           |  



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, that the borrowers financial condition is such that collection of interest is doubtful.



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Stock-based Compensation



The Company accounts for its stock-based compensation plans using the accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees.The Company is not required to adopt the fair value based recognition provisions prescribed under SFAS No. 123, Accounting for Stock Based Compensation, but complies with the disclosure requirements set forth in the
Statement (as amended by SFAS No. 148), which include disclosing pro forma net income as if the fair value based method of accounting had been applied.



NOTE 2. EARNINGS PER SHARE



Earnings per share for the three months ended March 31, 2004 and 2003 were calculated by dividing net income available to common stockholders by the weighted number of
shares outstanding during the period.



NOTE 3. BALANCE SHEETS



The balance sheet at December 31, 2003, has been taken from the audited
financial statements at that date.



NOTE 4. LETTERS OF CREDIT



At March 31, 2004, letters of credit totaling $1,034,195 were
outstanding.



NOTE 5. CHANGES IN STOCKHOLDERS EQUITY



On May 1, 2003, Surrey Bancorp exchanged six shares of its no par value common stock for
every five shares of $4.00 par value common stock of Surrey Bank & Trust. Fractional shares resulting from the transaction were paid in cash.



On June 12, 2003 the Company issued 189,356 shares of Series A, 4.5% Convertible Non-Cumulative Perpetual Preferred Stock at a liquidation value of $14.00 per share. The
issue was a private placement of which the net proceeds amounted to $2,620,325. The shares are convertible into .8695 shares of common stock.



NOTE 6. STOCK OPTION PLANS



The Company has adopted a qualified incentive stock option plan which reserves, as amended, 77,204 shares for purchase by eligible employees. Options granted under this
plan vest at the rate of 20% per year, expire not more than ten years from the date of grant, and are exercisable at not less than the fair market value of the stock at the date of the grant.



The Company also adopted a non-qualified stock option plan which reserves, as amended,
101,912 shares for purchase by non-employee directors. Options granted under this plan are exercisable after six months from the date of the grant at not less than the fair market value of the stock at the date of the grant. The life of such options
shall not extend more than ten years from the date of the grant.



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Information related to pro forma net income for the periods presented is as follows:



|                                                                               |  |           |         |      |   |        
|------------------------------------------------------------------------------ |  | --------- | ------- | ---- | - | -------
|                                                                               |  | March 31,
|                                                                               |  | 2004      |         | 2003
|Compensation cost recognized in income for all stock-based compensation awards |  | $         |        |      | $ |       
|                                                                               |  |           |         |      |   |        
|Pro forma net income, based on SFAS No. 123                                    |  | $         | 407,772 |      | $ | 326,767
|                                                                               |  |           |         |      |   |        
|Pro forma earnings per common share, based on SFAS No. 123                     |  | $         | 0.32    |      | $ | 0.28   
|                                                                               |  |           |         |      |   |        
|Pro forma earnings per fully dilutive common share, based on SFAS No. 123      |  | $         | 0.28    |      | $ | 0.27   
|                                                                               |  |           |         |      |   |        



NOTE 7. PURCHASE OF MINORITY
INTEREST



On March 1, 2003, the Bank acquired the minority interest in
Friendly Finance, LLC in a transaction accounted for as a purchase. Purchase consideration (equal to the Banks recorded minority interest in subsidiary) consisted of cancellation of notes and interest receivable from the minority interest
amounting to $422,984, cancellation of identified recourse obligations of the minority interest to the Bank of $243,850 and release of the minority interest from any future recourse obligation contingencies to the Bank, valued at $57,852. The Bank
recorded the release of the future recourse obligation amount as an increase in the allowance for loan losses.



NOTE 8. SUBSEQUENT EVENT



Subsequent to
March 31, 2004, the Bank entered into an agreement with another bank to sell its servicing rights to approximately $42,600,000 in mortgage loans. The transaction resulted in a one time gain to the Bank of approximately $503,000.



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##### Table of Contents

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



Introduction



This discussion, analysis and related financial information are presented to explain the significant factors which affected Surrey Bancorps financial condition and
results of operations for the three months ending March 31, 2004 and 2003. 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 one week later on July 22, 1996.



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



Highlights



Net income for the three months ended March 31, 2004, was $412,285 or $.29 per diluted share
outstanding compared to an $330,322 or $.27 per diluted share outstanding for the same period in 2003. Earnings for the period ended March 31, 2004 are approximately 24.8% higher than for the same period in 2003. Loan growth, improved margins and
growth in noninterest income contributed to this increase.



On March 31, 2004,
Surrey Bancorps assets totaled $144,711,045 compared to $135,077,005 on December 31, 2003. Net loans were $123,027,827 compared to $117,362,619 on December 31, 2003. This growth was primarily in the commercial loan area which increased 9.5%
over December 2003 totals.



Total deposits on March 31, 2004, were $120,821,556
compared to $111,277,876 at the end of 2003. This increase is attributable to an increase in all deposit account categories. Demand deposits increased 4.7% over 2003 totals. Certificates of deposit increased 9.2% over December 31, 2003 totals, while
savings deposits increased 15.4%.



Common stockholders equity increased
by $539,018 or 5.2% during the three months ended March 31, 2004 resulting in a common stock book value of $9.19 per share, up from $8.93 on December 31, 2003.



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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.



Bonds, notes, and debentures for which the Bank has the
positive intent and ability to hold to maturity are reported at cost, adjusted by premiums and discounts that are recognized in interest income using the interest method over the period to maturity or to call dates. The Bank had no Held to
Maturity securities at March 31, 2004 or December 31, 2003.



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.



Investments in available-for-sale securities of $3,812,065 consisted of U.S. Governmental Agency obligations with maturities ranging from one to two years, and GNMA adjustable rate mortgage securities, which adjust
annually.



Loans



Net loans outstanding on March 31, 2004, were $123,027,827 compared to $117,362,619 on
December 31, 2003. The Bank maintains a loan portfolio dominated by real estate and commercial loans diversified among various industries. Approximately 62.6% of the Banks loans as of March 31, 2004 are fixed rate loans with 37.4% floating
with the Banks prime rate or other appropriate internal or external indices.



Deposits



Deposits on March 31,
2004, were $120,821,556, compared to $111,277,876 on December 31, 2003.



The
March total comes from a base of approximately 9,226 accounts compared to 8,840 accounts at December 31, 2003; an 4.4% increase. Interest-bearing accounts represented 86.9% of the 2004 period-end deposits versus 85.5% at December 31, 2003.



Stockholders Equity



Surrey Bancorp maintains a strong capital position which exceeds all capital adequacy
requirements of Federal regulatory authorities. Under the risk-based capital guidelines, the Banks ratios of tier one capital to risk-weighted assets were 8.73% on March 31, 2004 and 8.87% on December 31, 2003. Total capital equals 9.98% of
risk-based assets on March 31, 2004, and 10.13% on December 31, 2003. The Banks capital ratios thus well exceeded the minimums of 4% for tier one capital and 8% for total capital set by banking regulators.



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The Bank also exceeds all capital requirements under the leverage guidelines with the Banks ratio of core capital
to total average assets totaling 8.06% on March 31, 2004, and 8.13% on December 31, 2003.



Asset Quality



The notes to the
financial statements contained within this report provide details of the activity in the allowance for possible loan losses.



The provision for possible loan losses charge to operations was $85,159 in the first three months of 2004 compared to $147,084 for the same period in 2003. The reserve
for loan losses on March 31, 2004 was $2,122,068 or 1.70% of period end loans. This percentage is derived from total loans. Approximately $18,895,963 of loans at March 31, 2004 are government guaranteed loans which the Banks exposure ranges
from 10% to 50% of the outstanding balance. When the guaranteed portion of the loans are removed from the equation the loan loss reserve is approximately 1.90% of outstanding loans.



Additionally, loan balances in Friendly Finance have reduced by approximately $325,000 since December 31, 2003 due to a slow down in the
used car market and more strict underwriting standards. Accordingly, the reserve attributable to this reduction in loans has been recaptured by Friendly Finance, LLC. Through March 31, 2004 reserves in Friendly Finance, LLC have been reduced by
$21,745.



The level of reserve is established based upon managements
evaluation of portfolio composition, current and projected national and local economic conditions, and results of independent reviews of the loan portfolio by internal and external examination. Management recognizes the inherent risk associated with
commercial and consumer 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. As a result, management continues to actively monitor the Banks assets quality and lending policies. 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 future loan losses and provide a sound reserve for the loan portfolio.



At March 31, 2004, the Bank had loans totaling approximately $199,536 in nonaccrual status.



Interest Sensitivity and Liquidity



One of the principal duties of the Banks Asset/Liability Management Committee is management of interest rate risk. The Bank utilitizes 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 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.



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At March 31, 2004, the liquidity position of the Company was adequate, with short-term liquid assets of $11,728,615.
Deposit growth was approximately $1,900,000 greater than the growth in loans in the first three months of 2004 resulting in a more liquid liquidity position compared to December 31, 2003. To provide supplemental liquidity, the Bank has five lines of
credit with correspondent banks totaling $10,700,000. There were no outstanding advances against these lines at March 31, 2004. Additionally, the Bank has a secured borrowing arrangement with the Federal Home Loan Bank. The maximum credit available
under this agreement approximates $20,800,000 at March 31, 2004. Advances taken down against the Federal Home Loan Bank line amounted to $8,150,000 at March 31, 2004. In addition, Friendly Finance, LLC has a secured revolving line of credit with
another commercial bank in the amount of $1,200,000. At March 31, 2004 no balance was due on this line.



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ITEM 3. 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-14. 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 reasonable likely to
materially affect, internal control over financial reporting.



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##### Table of Contents

PART II - OTHER INFORMATION



|        |  |                                                                         
|------- |  | ------------------------------------------------------------------------
|Item 1. |  | Legal Proceedings                                                       
|        | 
|        |  | No significant changes in legal proceedings occurred during the quarter.
|        | 
|Item 2. |  | Changes in Securities                                                   
|        | 
|Item 3. |  | Defaults Upon Senior Securities                                         
|        | 
|        |  | Not Applicable                                                          
|        | 
|Item 4. |  | Submission of Matters to a Vote of Security Holders                     
|        | 
|Item 5. |  | Other Information                                                       
|        | 
|        |  | None                                                                    
|        | 
|Item 6. |  | Exhibits and Reports on Form 8-K                                        
|        | 
|        |  | (a.)     Exhibits                                                       
|        | 
|        |  | 31.1 Certification                                                      
|        |  | 31.2 Certification                                                      
|        |  | 32. Certification                                                       
|        | 
|        |  | (b.)     Reports on 8-K                                                 
|        | 
|        |  | Incorporated by reference to 8-K filed March 17, 2004                   



16