##### 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 September 30, 2005



| ̈ | 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 ̈



Indicate by check mark whether the registrant is a shell company (as defined by 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 November 8, 2005,
there were 1,226,045 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 September 30, 2005 (Unaudited) and December 31, 2004                                      |  | 3    
|                                                                                              |  |                                                                                                                      
|                                                                                              |  | Consolidated Statements of Income, Nine Months Ended September 30, 2005 and 2004 (Unaudited)                          |  | 4    
|                                                                                              |  |                                                                                                                      
|                                                                                              |  | Consolidated Statements of Income, Three Months Ended September 30, 2005 and 2004 (Unaudited)                         |  | 5    
|                                                                                              |  |                                                                                                                      
|                                                                                              |  | Consolidated Statements of Cash Flows, Nine Months Ended September 30, 2005 and 2004 (Unaudited)                      |  | 6    
|                                                                                              |  |                                                                                                                      
|                                                                                              |  | Consolidated Statements of Changes in Shareholders Equity, Nine Months Ended September 30, 2005 and 2004 (Unaudited) |  | 7    
|                                                                                              |  |                                                                                                                      
|                                                                                              |  | Notes to Consolidated Financial Statements                                                                            |  | 8-13 
|                                                                                              | 
|Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 14-18                                                                                                                
|                                                                                              | 
|Item 3.
Controls and Procedures                                                               |  | 19                                                                                                                   
|                                                                                              |  |                                                                                                                      
|                                                                                              |  | PART II -
OTHER INFORMATION                                                                                           |  | 20   
|                                                                                              |  |                                                                                                                      
|                                                                                              |  | SIGNATURES AND CERITIFICATIONS                                                                                        |  | 21-26



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##### Table of Contents

|                                                                                                                                                                                                                         |  |                |             |   |               |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -------------- | ----------- | - | ------------- | - | ----------- | -
|Consolidated Balance Sheets                                                                                                                                                                                              |  | Unaudited      |             |   | Audited       |  
|September 30, 2005 and December 31, 2004                                                                                                                                                                                 |  |                |             |   |               |   |             |  
|                                                                                                                                                                                                                         |  | September 2005 |             |   | December 2004 |  
|Assets                                                                                                                                                                                                                   |  |                |             |   |               |   |             |  
|                                                                                                                                                                                                                         |  |               
|Cash and due from banks                                                                                                                                                                                                  |  | $              | 1,324,082   |   |               | $ | 1,810,543   |  
|Interest-bearing deposits with banks                                                                                                                                                                                     |  |                | 12,842,043  |   |               |   | 12,759,356  |  
|Federal funds sold                                                                                                                                                                                                       |  |                | 503,000     |   |               |   | 301,000     |  
|Investment securities available for sale                                                                                                                                                                                 |  |                | 3,144,572   |   |               |   | 2,692,151   |  
|Restricted equity securities                                                                                                                                                                                             |  |                | 1,007,130   |   |               |   | 790,660     |  
|Loans, net of allowance of loan losses of $2,279,488 in 2005 and $2,294,131 in 2004                                                                                                                                      |  |                | 141,994,586 |   |               |   | 133,046,165 |  
|Other real estate owned                                                                                                                                                                                                  |  |                | 116,132     |   |               |   |            |  
|Property and equipment, net                                                                                                                                                                                              |  |                | 4,679,119   |   |               |   | 4,232,424   |  
|Accrued income                                                                                                                                                                                                           |  |                | 789,311     |   |               |   | 583,365     |  
|Goodwill                                                                                                                                                                                                                 |  |                | 120,000     |   |               |   | 120,000     |  
|Bank owned life insurance                                                                                                                                                                                                |  |                | 2,714,043   |   |               |   |            |  
|Other assets                                                                                                                                                                                                             |  |                | 1,807,282   |   |               |   | 957,276     |  
|                                                                                                                                                                                                                         |  |                |             |   |               |   |             |  
|                                                                                                                                                                                                                         |  | $              | 171,041,300 |   |               | $ | 157,292,940 |  
|                                                                                                                                                                                                                         |  |                |             |   |               |   |             |  
|Liabilities and Shareholders Equity                                                                                                                                                                                     |  |                |             |   |               |   |             |  
|                                                                                                                                                                                                                         |  |               
|Liabilities                                                                                                                                                                                                              |  |                |             |   |               |   |             |  
|Deposits:                                                                                                                                                                                                                |  |                |             |   |               |   |             |  
|Noninterest-bearing                                                                                                                                                                                                      |  | $              | 22,439,771  |   |               | $ | 18,201,595  |  
|Interest-bearing                                                                                                                                                                                                         |  |                | 116,502,032 |   |               |   | 108,752,371 |  
|                                                                                                                                                                                                                         |  |                |             |   |               |   |             |  
|Total deposits                                                                                                                                                                                                           |  |                | 138,941,803 |   |               |   | 126,953,966 |  
|                                                                                                                                                                                                                         |  |               
|Federal funds purchased and securities sold under agreements to repurchase                                                                                                                                               |  |                | 888,529     |   |               |   | 3,447,823   |  
|Long-term debt                                                                                                                                                                                                           |  |                | 12,995,631  |   |               |   | 11,298,952  |  
|Dividends payable on preferred stock                                                                                                                                                                                     |  |                | 30,068      |   |               |   | 29,987      |  
|Accrued interest payable                                                                                                                                                                                                 |  |                | 347,325     |   |               |   | 161,103     |  
|Other liabilities                                                                                                                                                                                                        |  |                | 1,204,477   |   |               |   | 355,688     |  
|                                                                                                                                                                                                                         |  |                |             |   |               |   |             |  
|                                                                                                                                                                                                                         |  |                | 154,407,833 |   |               |   | 142,247,519 |  
|                                                                                                                                                                                                                         |  |                |             |   |               |   |             |  
|Commitments and contingencies                                                                                                                                                                                            |  |                |            |   |               |   |            |  
|                                                                                                                                                                                                                         |  |               
|Shareholders 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 liquidation value of $14 per share in 2005 and 2004 |  |                | 2,620,325   |   |               |   | 2,620,325   |  
|Common stock, 5,000,000 shares authorized at no par value 1,226,045 shares issued in 2005 and 1,211,008 shares issued in 2004                                                                                            |  |                | 8,234,983   |   |               |   | 8,100,261   |  
|Retained earnings                                                                                                                                                                                                        |  |                | 5,795,356   |   |               |   | 4,337,224   |  
|Accumulated other comprehensive income (loss)                                                                                                                                                                            |  |                | (17,197     | ) |               |   | (12,389     | )
|                                                                                                                                                                                                                         |  |                |             |   |               |   |             |  
|                                                                                                                                                                                                                         |  |                | 16,633,467  |   |               |   | 15,045,421  |  
|                                                                                                                                                                                                                         |  |                |             |   |               |   |             |  
|                                                                                                                                                                                                                         |  | $              | 171,041,300 |   |               | $ | 157,292,940 |  
|                                                                                                                                                                                                                         |  |                |             |   |               |   |             |  



See Notes to Consolidated
Financial Statements.



3



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##### Table of Contents

|                                                     |  |      |           |   |           |   |           |  
|---------------------------------------------------- |  | ---- | --------- | - | --------- | - | --------- | -
|Consolidated Statements of Income                    |  |      |           |   | Unaudited |  
|Nine months ended September 30, 2005 and 2004        |  |      |           |   |           |   |           |  
|                                                     |  | 2005 |           |   | 2004      |  
|Interest income:                                     |  |      |           |   |           |   |           |  
|Loans and fees on loans                              |  | $    | 7,400,901 |   |           | $ | 6,032,929 |  
|Federal funds sold                                   |  |      | 9,991     |   |           |   | 1,065     |  
|Investment securities, taxable                       |  |      | 90,581    |   |           |   | 61,095    |  
|Investment securities, non taxable                   |  |      |          |   |           |   | 456       |  
|Deposits with banks                                  |  |      | 189,933   |   |           |   | 78,872    |  
|                                                     |  |      |           |   |           |   |           |  
|                                                     |  |      | 7,691,406 |   |           |   | 6,174,417 |  
|                                                     |  |      |           |   |           |   |           |  
|Interest expense:                                    |  |      |           |   |           |   |           |  
|Deposits                                             |  |      | 2,221,050 |   |           |   | 1,540,200 |  
|Federal funds purchased                              |  |      | 1,108     |   |           |   | 1,697     |  
|Securities sold under agreements to repurchase       |  |      | 9,257     |   |           |   | 2,059     |  
|Short-term borrowings                                |  |      |          |   |           |   | 5,291     |  
|Long-term borrowings                                 |  |      | 361,686   |   |           |   | 194,452   |  
|                                                     |  |      |           |   |           |   |           |  
|                                                     |  |      | 2,593,101 |   |           |   | 1,743,699 |  
|                                                     |  |      |           |   |           |   |           |  
|Net interest income                                  |  |      | 5,098,305 |   |           |   | 4,430,718 |  
|                                                     |  |     
|Provision for loan losses                            |  |      | 275,583   |   |           |   | 208,662   |  
|                                                     |  |      |           |   |           |   |           |  
|Net interest income after provision for loan losses  |  |      | 4,822,722 |   |           |   | 4,222,056 |  
|                                                     |  |      |           |   |           |   |           |  
|Noninterest income:                                  |  |      |           |   |           |   |           |  
|Service charges on deposit accounts                  |  |      | 733,055   |   |           |   | 710,074   |  
|Gain and fees from sale of mortgage servicing rights |  |      |          |   |           |   | 501,610   |  
|Gain on the sale of loans held for sale              |  |      | 181,545   |   |           |   |          |  
|Loss on the sale of foreclosed assets                |  |      | (525      | ) |           |   |          |  
|Other service charges and fees                       |  |      | 268,677   |   |           |   | 332,863   |  
|Other operating income                               |  |      | 365,176   |   |           |   | 325,863   |  
|                                                     |  |      |           |   |           |   |           |  
|                                                     |  |      | 1,547,928 |   |           |   | 1,870,410 |  
|                                                     |  |      |           |   |           |   |           |  
|Noninterest expense:                                 |  |      |           |   |           |   |           |  
|Salaries and employee benefits                       |  |      | 1,869,640 |   |           |   | 1,944,380 |  
|Occupancy expense                                    |  |      | 272,486   |   |           |   | 273,443   |  
|Equipment expense                                    |  |      | 271,420   |   |           |   | 303,533   |  
|Data processing                                      |  |      | 268,176   |   |           |   | 273,162   |  
|Other expense                                        |  |      | 1,200,702 |   |           |   | 1,044,026 |  
|                                                     |  |      |           |   |           |   |           |  
|                                                     |  |      | 3,882,424 |   |           |   | 3,838,544 |  
|                                                     |  |      |           |   |           |   |           |  
|Net income before income taxes                       |  |      | 2,488,226 |   |           |   | 2,253,922 |  
|                                                     |  |     
|Income tax expense                                   |  |      | 940,869   |   |           |   | 872,450   |  
|                                                     |  |      |           |   |           |   |           |  
|Net income                                           |  |      | 1,547,357 |   |           |   | 1,381,472 |  
|                                                     |  |     
|Preferred stock dividend declared                    |  |      | (89,225   | ) |           |   | (89,290   | )
|                                                     |  |      |           |   |           |   |           |  
|Net income available for common shareholders         |  | $    | 1,458,132 |   |           | $ | 1,292,182 |  
|                                                     |  |      |           |   |           |   |           |  
|Basic earnings per share                             |  | $    | 1.20      |   |           | $ | 1.08      |  
|                                                     |  |      |           |   |           |   |           |  
|Diluted earnings per share                           |  | $    | 1.07      |   |           | $ | 0.95      |  
|                                                     |  |      |           |   |           |   |           |  
|Basic weighted average shares outstanding            |  |      | 1,219,077 |   |           |   | 1,191,759 |  
|                                                     |  |      |           |   |           |   |           |  
|Diluted weighted average shares outstanding          |  |      | 1,452,078 |   |           |   | 1,457,679 |  
|                                                     |  |      |           |   |           |   |           |  



See Notes to Consolidated
Financial Statements.



4



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##### Table of Contents

|                                                    |  |      |           |   |           |   |           |  
|--------------------------------------------------- |  | ---- | --------- | - | --------- | - | --------- | -
|Consolidated Statements of Income                   |  |      |           |   | Unaudited |  
|Three months ended September 30, 2005 and 2004      |  |      |           |   |           |   |           |  
|                                                    |  | 2005 |           |   | 2004      |  
|Interest income:                                    |  |      |           |   |           |   |           |  
|Loans and fees on loans                             |  | $    | 2,676,173 |   |           | $ | 2,061,279 |  
|Federal funds sold                                  |  |      | 4,270     |   |           |   | 1,065     |  
|Investment securities, taxable                      |  |      | 30,525    |   |           |   | 19,562    |  
|Investment securities, non taxable                  |  |      |          |   |           |   |          |  
|Deposits with banks                                 |  |      | 76,991    |   |           |   | 49,609    |  
|                                                    |  |      |           |   |           |   |           |  
|                                                    |  |      | 2,787,959 |   |           |   | 2,131,515 |  
|                                                    |  |      |           |   |           |   |           |  
|Interest expense:                                   |  |      |           |   |           |   |           |  
|Deposits                                            |  |      | 832,430   |   |           |   | 564,952   |  
|Federal funds purchased                             |  |      |          |   |           |   |          |  
|Securities sold under agreements to repurchase      |  |      | 2,953     |   |           |   | 764       |  
|Short-term borrowings                               |  |      |          |   |           |   |          |  
|Long-term borrowings                                |  |      | 134,223   |   |           |   | 81,521    |  
|                                                    |  |      |           |   |           |   |           |  
|                                                    |  |      | 969,606   |   |           |   | 647,237   |  
|                                                    |  |      |           |   |           |   |           |  
|Net interest income                                 |  |      | 1,818,353 |   |           |   | 1,484,278 |  
|                                                    |  |     
|Provision for loan losses                           |  |      | 102,902   |   |           |   | 82,019    |  
|                                                    |  |      |           |   |           |   |           |  
|Net interest income after provision for loan losses |  |      | 1,715,451 |   |           |   | 1,402,259 |  
|                                                    |  |      |           |   |           |   |           |  
|Noninterest income:                                 |  |      |           |   |           |   |           |  
|Service charges on deposit accounts                 |  |      | 273,424   |   |           |   | 252,014   |  
|Gain on the sale of loans held for sale             |  |      | 181,545   |   |           |   |          |  
|Loss on the sale of foreclosed assets               |  |      | (525      | ) |           |   |          |  
|Other service charges and fees                      |  |      | 97,851    |   |           |   | 111,724   |  
|Other operating income                              |  |      | 99,855    |   |           |   | 108,007   |  
|                                                    |  |      |           |   |           |   |           |  
|                                                    |  |      | 652,150   |   |           |   | 471,745   |  
|                                                    |  |      |           |   |           |   |           |  
|Noninterest expense:                                |  |      |           |   |           |   |           |  
|Salaries and employee benefits                      |  |      | 640,854   |   |           |   | 656,182   |  
|Occupancy expense                                   |  |      | 100,530   |   |           |   | 103,363   |  
|Equipment expense                                   |  |      | 88,728    |   |           |   | 71,096    |  
|Data processing                                     |  |      | 92,780    |   |           |   | 93,528    |  
|Other expense                                       |  |      | 440,989   |   |           |   | 413,494   |  
|                                                    |  |      |           |   |           |   |           |  
|                                                    |  |      | 1,363,881 |   |           |   | 1,337,663 |  
|                                                    |  |      |           |   |           |   |           |  
|Net income before income taxes                      |  |      | 1,003,720 |   |           |   | 536,341   |  
|                                                    |  |     
|Income tax expense                                  |  |      | 378,872   |   |           |   | 208,250   |  
|                                                    |  |      |           |   |           |   |           |  
|Net income                                          |  |      | 624,848   |   |           |   | 328,091   |  
|                                                    |  |     
|Preferred stock dividend declared                   |  |      | (30,068   | ) |           |   | (29,986   | )
|                                                    |  |      |           |   |           |   |           |  
|Net income available for common shareholders        |  | $    | 594,780   |   |           | $ | 298,105   |  
|                                                    |  |      |           |   |           |   |           |  
|Basic earnings per share                            |  | $    | 0.49      |   |           | $ | 0.25      |  
|                                                    |  |      |           |   |           |   |           |  
|Diluted earnings per share                          |  | $    | 0.43      |   |           | $ | 0.22      |  
|                                                    |  |      |           |   |           |   |           |  
|Basic weighted average shares outstanding           |  |      | 1,225,684 |   |           |   | 1,197,795 |  
|                                                    |  |      |           |   |           |   |           |  
|Diluted weighted average shares outstanding         |  |      | 1,458,859 |   |           |   | 1,469,047 |  
|                                                    |  |      |           |   |           |   |           |  



See Notes to Consolidated
Financial Statements.



5



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##### Table of Contents

|                                                                                      |  |      |             |   |           |   |             |  
|------------------------------------------------------------------------------------- |  | ---- | ----------- | - | --------- | - | ----------- | -
|Consolidated Statements of Cash Flows                                                 |  |      |             |   | Unaudited |  
|Nine months ended September 30, 2005 and 2004                                         |  |      |             |   |           |   |             |  
|                                                                                      |  | 2005 |             |   | 2004      |  
|Cash flows from operating activities:                                                 |  |      |             |   |           |   |             |  
|Net income                                                                            |  | $    | 1,547,357   |   |           | $ | 1,381,472   |  
|Adjustments to reconcile net income to net cash provided by operations:               |  |      |             |   |           |   |             |  
|Depreciation and amortization                                                         |  |      | 261,572     |   |           |   | 298,212     |  
|Loss on the sale/abandonment of fixed assets                                          |  |      | 20,672      |   |           |   | 518         |  
|Provision for loan losses                                                             |  |      | 275,583     |   |           |   | 208,662     |  
|Deferred income taxes                                                                 |  |      | (18,032     | ) |           |   |            |  
|Accretion of discount on securities, net of amortization of premiums                  |  |      | (25,056     | ) |           |   | (10,040     | )
|Increase in cash surrender value of life insurance                                    |  |      | (64,043     | ) |           |   |            |  
|Changes in assets and liabilities:                                                    |  |      |             |   |           |   |             |  
|Accrued income                                                                        |  |      | (205,946    | ) |           |   | (70,435     | )
|Other assets                                                                          |  |      | (828,958    | ) |           |   | (709,094    | )
|Accrued interest payable                                                              |  |      | 186,222     |   |           |   | 57,645      |  
|Other liabilities                                                                     |  |      | 848,789     |   |           |   | 694,947     |  
|                                                                                      |  |      |             |   |           |   |             |  
|Net cash provided by operating activities                                             |  |      | 1,998,160   |   |           |   | 1,851,887   |  
|                                                                                      |  |      |             |   |           |   |             |  
|Cash flows from investing activities:                                                 |  |      |             |   |           |   |             |  
|Net increase in interest-bearing deposits with banks                                  |  |      | (82,687     | ) |           |   | (13,062,248 | )
|Net increase in federal funds sold                                                    |  |      | (202,000    | ) |           |   | (400,000    | )
|Purchase of investment securities                                                     |  |      | (4,475,286  | ) |           |   | (3,991,315  | )
|Sales and maturities of investment securities                                         |  |      | 4,040,097   |   |           |   | 6,189,778   |  
|(Purchase) redemption of restricted equity securities                                 |  |      | (216,470    | ) |           |   | (67,500     | )
|Net increase in loans                                                                 |  |      | (9,340,136  | ) |           |   | (11,272,175 | )
|Proceeds from the sale of fixed assets                                                |  |      |            |   |           |   | 700         |  
|Purchases of property and equipment                                                   |  |      | (728,939    | ) |           |   | (291,146    | )
|Purchase of bank owned life insurance                                                 |  |      | (2,650,000  | ) |           |   |            |  
|                                                                                      |  |      |             |   |           |   |             |  
|Net cash used in investing activities                                                 |  |      | (13,655,421 | ) |           |   | (22,893,906 | )
|                                                                                      |  |      |             |   |           |   |             |  
|Cash flows from financing activities:                                                 |  |      |             |   |           |   |             |  
|Net increase in deposits                                                              |  |      | 11,987,837  |   |           |   | 20,575,573  |  
|                                                                                      |  |     
|Net decrease in fed funds puchased and securities sold under agreements to repurchase |  |      | (2,559,294  | ) |           |   | (2,520,711  | )
|Net decrease in short-term debt                                                       |  |      |            |   |           |   | (1,400,000  | )
|Net increase in long-term debt                                                        |  |      | 1,696,679   |   |           |   | 4,553,854   |  
|Dividends paid on preferred stock                                                     |  |      | (89,144     | ) |           |   | (89,374     | )
|Common stock options exercised                                                        |  |      | 89,036      |   |           |   | 172,324     |  
|Tax benefit related to exercise of non-incentive stock options                        |  |      | 45,686      |   |           |   |            |  
|                                                                                      |  |      |             |   |           |   |             |  
|Net cash provided by financing activities                                             |  |      | 11,170,800  |   |           |   | 21,291,666  |  
|                                                                                      |  |      |             |   |           |   |             |  
|Net increase (decrease) in cash and cash equivalents                                  |  |      | (486,461    | ) |           |   | 249,647     |  
|                                                                                      |  |     
|Cash and cash equivalents, beginning                                                  |  |      | 1,810,543   |   |           |   | 1,956,473   |  
|                                                                                      |  |      |             |   |           |   |             |  
|Cash and cash equivalents, ending                                                     |  | $    | 1,324,082   |   |           | $ | 2,206,120   |  
|                                                                                      |  |      |             |   |           |   |             |  
|Supplemental disclosure of cash flow information:                                     |  |      |             |   |           |   |             |  
|Interest paid                                                                         |  | $    | 2,406,879   |   |           | $ | 1,686,054   |  
|                                                                                      |  |      |             |   |           |   |             |  
|Taxes paid                                                                            |  | $    | 898,824     |   |           | $ | 766,522     |  
|                                                                                      |  |      |             |   |           |   |             |  
|Loans transferred to other real estate owned                                          |  | $    | 116,132     |   |           | $ |            |  
|                                                                                      |  |      |             |   |           |   |             |  



See Notes to Consolidated
Financial Statements.



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##### Table of Contents

|                                                                                                                    |  |                             |  |              |           |                  |           |        |                                                   |           |  |       |           |   |  |   |         |   |  |   |            |  
|------------------------------------------------------------------------------------------------------------------- |  | --------------------------- |  | ------------ | --------- | ---------------- | --------- | ------ | ------------------------------------------------- | --------- |  | ----- | --------- | - |  | - | ------- | - |  | - | ---------- | -
|Consolidated Statements of Changes in Shareholders Equity                                                          |  |                             |  | Unaudited    |          
|Nine months ended September 30, 2005 and 2004                                                                       |  |                             |  |              |          
|                                                                                                                    |  |                             |  |              |          
|                                                                                                                    |  | Convertible Preferred Stock |  | Common Stock |           | RetainedEarnings |           |        | UnrealizedAppreciation(Depreciation)on Securities |           |  | Total |          
|                                                                                                                    |  | Shares                      |  | Amount       |           | Shares           |           | Amount |                                                   |           | 
|Balance January 1, 2004                                                                                             |  | 189,356                     |  | $            | 2,620,325 |                  | 1,170,189 |        | $                                                 | 7,822,387 |  | $     | 2,627,529 |   |  | $ | 3,225   |   |  | $ | 13,073,466 |  
|                                                                                                                    |  |                             |  |              |           |                  |          
|Comprehensive income                                                                                                |  |                             |  |              |           |                  |           |        |                                                   |           |  |       |           |   |  |   |         |   |  |   |            |  
|Net income                                                                                                          |  |                             |  |              |           |                  |           |        |                                                   |           |  |       | 1,381,472 |   |  |   |         |   |  |   | 1,381,472  |  
|Change in unrealized appreciation on investment securities available for sale, net of income taxes of $6,440        |  |                             |  |              |           |                  |           |        |                                                   |           |  |       |           |   |  |   | (10,264 | ) |  |   | (10,264    | )
|                                                                                                                    |  |                             |  |              |           |                  |           |        |                                                   |           |  |       |           |   |  |   |         |   |  |   |            |  
|Total comprehensive income                                                                                          |  |                             |  |              |           |                  |           |        |                                                   |           |  |       |           |   |  |   |         |   |  |   | 1,371,208  |  
|                                                                                                                    |  |                             |  |              |           |                  |          
|Common stock issued                                                                                                 |  |                             |  |              |           |                  |           |        |                                                   |           |  |       |           |   |  |   |         |   |  |   |            |  
|Common stock options exercised                                                                                      |  |                             |  |              |           |                  | 28,993    |        |                                                   | 172,324   |  |       |           |   |  |   |         |   |  |   | 172,324    |  
|                                                                                                                    |  |                             |  |              |           |                  |          
|Dividends declared on convertible preferred stock ($.47 per share)                                                  |  |                             |  |              |           |                  |           |        |                                                   |           |  |       | (89,290   | ) |  |   |         |   |  |   | (89,290    | )
|                                                                                                                    |  |                             |  |              |           |                  |           |        |                                                   |           |  |       |           |   |  |   |         |   |  |   |            |  
|Balance, September 30, 2004                                                                                         |  | 189,356                     |  | $            | 2,620,325 |                  | 1,199,182 |        | $                                                 | 7,994,711 |  | $     | 3,919,711 |   |  | $ | (7,039  | ) |  | $ | 14,527,708 |  
|                                                                                                                    |  |                             |  |              |           |                  |           |        |                                                   |           |  |       |           |   |  |   |         |   |  |   |            |  
|Balance January 1, 2005                                                                                             |  | 189,356                     |  | $            | 2,620,325 |                  | 1,211,008 |        | $                                                 | 8,100,261 |  | $     | 4,337,224 |   |  | $ | (12,389 | ) |  | $ | 15,045,421 |  
|                                                                                                                    |  |                             |  |              |           |                  |          
|Comprehensive income                                                                                                |  |                             |  |              |           |                  |           |        |                                                   |           |  |       |           |   |  |   |         |   |  |   |            |  
|Net income                                                                                                          |  |                             |  |              |           |                  |           |        |                                                   |           |  |       | 1,547,357 |   |  |   |         |   |  |   | 1,547,357  |  
|Change in unrealized depreciation on investment securities available for sale, net of income tax benefits of $3,016 |  |                             |  |              |           |                  |           |        |                                                   |           |  |       |           |   |  |   | (4,808  | ) |  |   | (4,808     | )
|                                                                                                                    |  |                             |  |              |           |                  |           |        |                                                   |           |  |       |           |   |  |   |         |   |  |   |            |  
|Total comprehensive income                                                                                          |  |                             |  |              |           |                  |           |        |                                                   |           |  |       |           |   |  |   |         |   |  |   | 1,542,549  |  
|                                                                                                                    |  |                             |  |              |           |                  |          
|Common stock issued                                                                                                 |  |                             |  |              |           |                  |           |        |                                                   |           |  |       |           |   |  |   |         |   |  |   |            |  
|Common stock options exercised                                                                                      |  |                             |  |              |           |                  | 15,037    |        |                                                   | 89,036    |  |       |           |   |  |   |         |   |  |   | 89,036     |  
|Tax benefit related to exercise of non-incentive stock options                                                      |  |                             |  |              |           |                  |           |        |                                                   | 45,686    |  |       |           |   |  |   |         |   |  |   | 45,686     |  
|                                                                                                                    |  |                             |  |              |           |                  |          
|Dividends declared on convertible preferred stock ($.47 per share)                                                  |  |                             |  |              |           |                  |           |        |                                                   |           |  |       | (89,225   | ) |  |   |         |   |  |   | (89,225    | )
|                                                                                                                    |  |                             |  |              |           |                  |           |        |                                                   |           |  |       |           |   |  |   |         |   |  |   |            |  
|Balance, September 30, 2005                                                                                         |  | 189,356                     |  | $            | 2,620,325 |                  | 1,226,045 |        | $                                                 | 8,234,983 |  | $     | 5,795,356 |   |  | $ | (17,197 | ) |  | $ | 16,633,467 |  
|                                                                                                                    |  |                             |  |              |           |                  |           |        |                                                   |           |  |       |           |   |  |   |         |   |  |   |            |  



See Notes to Consolidated
Financial Statements.



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##### Table of Contents

SURREY BANCORP

NOTES TO CONSOLIDATED 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 September 30, 2005 and December 31, 2004, the results of operations for the nine and three months ended September 30, 2005 and 2004, and its
changes in stockholders equity and cash flows for the nine months ended September 30, 2005 and 2004. All adjustments are of a normal and recurring nature. The results of operations for the nine months ended September 30, 2005 are not
necessarily indicative of the results expected for the full year. These financial statements should be read in conjunction with the Companys audited financial statements and related disclosures for the year ended December 31, 2004
included in the Companys Form 10-KSB.



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 (the 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. On January 1, 2005, Friendly Finance LLCs name was changed to Freedom Finance, LLC.



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.



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##### Table of Contents

CRITICAL ACCOUNTING POLICIES



The notes to our audited consolidated financial statements for the year ended December 31, 2004 contain a summary of our significant
accounting policies. We believe our policies with respect to the methodology for our 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 with often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumption 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.



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 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.



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 September 30,
2005 and December 31, 2004, the Bank had no investments classified as held to maturity.



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##### Table of Contents

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 September 30, 2005 and December 31, 2004, the Bank had no loans mortgage loans classified as available for sale.



The Bank originates and holds SBA and USDA guaranteed loans in its portfolio in the normal
course of business. During the third quarter of 2005 the Bank entered a program to sell the guaranteed portions of these loans into the secondary market. The loans are generally variable rate loans which eliminates the market risk to the Bank and
are therefore carried at cost. The Bank recognizes gains on the sale of the guaranteed portion upon the consummation of the sale. The Bank plans to continue to originate guaranteed loans for sales, however no such loans were funded at
September 30, 2005.



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 nine months ended September 30, 2005 and 2004 follows:



|                                 |  |               |           |   |      |   |           |  
|-------------------------------- |  | ------------- | --------- | - | ---- | - | --------- | -
|                                 |  | September 30, |          
|                                 |  | 2005          |           |   | 2004 |  
|Balance at beginning of year     |  | $             | 2,294,131 |   |      | $ | 2,109,820 |  
|Add provision charged to expense |  |               | 275,583   |   |      |   | 208,662   |  
|Less net charge-offs             |  |               | (290,226  | ) |      |   | (122,035  | )
|                                 |  |               |           |   |      |   |           |  
|                                 |  | $             | 2,279,488 |   |      | $ | 2,196,447 |  
|                                 |  |               |           |   |      |   |           |  



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.



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.



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##### Table of Contents

NOTE 2. EARNINGS PER SHARE



Basic earnings per share for the nine and three months ended September 30, 2005 and 2004 were calculated by dividing net income
available to common shareholders 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 which is convertible into .8695 shares of common stock.



NOTE 3. BALANCE SHEETS



The balance sheet at December 31, 2004, has been taken from the audited financial statements at that date.



NOTE 4. COMMITMENTS AND LETTERS OF CREDIT



At September 30, 2005, the Company had commitments to extend credit, including unused
lines of credit of approximately $24,975,000. Letters of credit totaling $1,523,866 were outstanding.



NOTE 5. STOCK OPTION PLANS



The Company
has adopted a qualified incentive stock option plan which reserves, as amended, 63,798 shares (adjusted for stock exchange, dividends and exercised 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, 85,671 shares (adjusted for stock exchange, dividends
and exercised 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.



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



|                                                                               |  |               |           |      |   |          
|------------------------------------------------------------------------------ |  | ------------- | --------- | ---- | - | ---------
|                                                                               |  | September 30,
|                                                                               |  | 2005          |           | 2004
|Compensation cost recognized in income for all stock-based compensation awards |  | $             |          |      | $ |         
|                                                                               |  |               |           |      |   |          
|Pro forma net income available to common shareholders, based on SFAS No. 123   |  | $             | 1,442,304 |      | $ | 1,278,542
|                                                                               |  |               |           |      |   |          
|Pro forma earnings per common share, based on SFAS No. 123                     |  | $             | 1.18      |      | $ | 1.07     
|                                                                               |  |               |           |      |   |          
|Pro forma earnings per fully dilutive common share, based on SFAS No. 123      |  | $             | 1.05      |      | $ | 0.94     
|                                                                               |  |               |           |      |   |          



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NOTE 6. SEGMENT REPORTING



The Company has two reportable segments, the Bank and Freedom Finance, LLC (subsidiary). The Bank provides mortgage, consumer and commercial
loans. Freedom Finance, LLC specializes in the purchase of sales finance contracts from local automobile dealers. Information about reportable segments, and reconciliation of such information to the consolidated financial statements as of and for
the nine months ended September 30, 2005 and 2004 is as follows:



|                                   |  |      |             |                      |   |           |                          |  |   |                     |   |  |   |            
|---------------------------------- |  | ---- | ----------- | -------------------- | - | --------- | ------------------------ |  | - | ------------------- | - |  | - | -----------
|                                   |  | Bank |             | Freedom Finance, LLC |   |           | Intersegment Elimination |  |   | Consolidated Totals
|September 30, 2005                 |  |      |             |                      |   |           |                          |  |   |                     |   |  |   |            
|Net interest income                |  | $    | 4,875,903   |                      | $ | 222,402   |                          |  | $ |                    |   |  | $ | $5,098,305 
|Other revenue  external customers |  |      | 1,545,831   |                      |   | 2,622     |                          |  |   |                    |   |  |   | 1,548,453  
|Depreciation and amortization      |  |      |             |                      |   | 1,953     |                          |  |   |                    |   |  |   | 261,572    
|Provision for loan losses          |  |      | 272,868     |                      |   | 2,715     |                          |  |   |                    |   |  |   | 275,583    
|                                   |  |      |             |                     
|Net income                         |  |      | 1,521,290   |                      |   | 26,067    |                          |  |   |                    |   |  |   | 1,547,357  
|                                   |  |      |             |                     
|Assets                             |  |      | 187,669,845 |                      |   | 1,690,652 |                          |  |   | (18,319,197         | ) |  |   | 171,041,300
|                                   |  |      |             |                     
|September 30, 2004                 |  |      |             |                      |   |           |                          |  |   |                     |   |  |   |            
|Net interest income                |  | $    | 4,253,688   |                      | $ | 177,030   |                          |  | $ |                    |   |  | $ | $4,430,718 
|Other revenue  external customers |  |      | 1,848,596   |                      |   | 21,814    |                          |  |   |                    |   |  |   | 1,870,410  
|Depreciation and amortization      |  |      | 294,172     |                      |   | 4,040     |                          |  |   |                    |   |  |   | 298,212    
|Provision for loan losses          |  |      | 267,107     |                      |   | (58,445   | )                        |  |   |                    |   |  |   | 208,662    
|                                   |  |      |             |                     
|Net income                         |  |      | 1,285,244   |                      |   | 96,228    |                          |  |   |                    |   |  |   | 1,381,472  
|                                   |  |      |             |                     
|Assets                             |  |      | 173,024,925 |                      |   | 1,612,715 |                          |  |   | (16,145,169         | ) |  |   | 158,492,471



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.



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 September 30, 2005. The Company does allocate income taxes to the segments. Other revenue represents noninterest income which is also allocated to the
segments. The Company includes the holding company and an insurance and investment agency in its Bank segment above. The Company does not have any single external customer from which is derives 10 percent or more of its revenues and operations in
one geographical area.



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##### Table of Contents

Note 7. BENEFIT PLANS



During the first quarter of 2005, the Company adopted a Supplemental Retirement Benefit Plan (SERP) to provide future compensation to certain members of management. Under
plan provisions, payments projected to range from $16,388 to $89,914 are payable for the life of the executive, generally beginning at age 65. The liability accrued for the compensation under the plan was $46,767 at September 30, 2005. Employee
benefits expense, an actuarially determined amount, was $46,767 for the nine months ended September 30, 2005. The assumed discount rate, rate of compensation increase, and expected long-term rate of return on plan assets used in the initial
calculations for the plan were 7%, 4% and 6.62%, respectively.



During the
first quarter of 2005, the Company also adopted a deferred compensation plan under which directors may elect to defer their directors fees. Participating directors receive an additional 30% matching contribution and will be paid an annual
benefit for a specified number of years after retirement, generally beginning at age 65. The maximum payout period is ten years. Deferred directors fees accrued and expensed under the plan for the nine months ended September 30, 2005, was
$43,128. The amounts deferred are held in a rabbi trust.



The Company has
purchased and is the primary beneficiary of life insurance policies designed to fund the Supplemental Retirement Benefit Plan and the directors deferred compensation liability. The cash value of the life insurance policies totaled $2,714,043
at September 30, 2005.



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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 nine and three months ending September 30, 2005 and 2004. 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.



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 shareholders for the three months ended September 30, 2005, was $594,780 or $.43 per diluted share outstanding compared to a $298,105 or $.22 per diluted share outstanding for the same period in 2004. Earnings for
the three months ended September 30, 2005 are approximately 199.5% higher than for the same period in 2004. The increase results from a 22.5% increase in net interest income and a 38.5% increase in non interest income over the same period in
2004. The net interest income increase is primarily due to growth and an improvement in our net interest margin. The increase in non interest income results from the gain received on the sale of the guaranteed portion of certain SBA and USDA loans.
These types of sales commenced during the quarter ended September 30, 2005 and the gains realized amounted to approximately $182,000. Management intends to continue this type of sales activity to manage its liquidity position and provide
profits for the Company.



Net income available for common shareholders for the
nine months ended September 30, 2005, was $1,458,132 or $1.07 per diluted share outstanding compared to a $1,292,182 or $.95 per diluted share outstanding for the same period in 2004. Earnings for the nine months ended September 30, 2005
are approximately 12.8% higher than for the same period in 2004. The increase primarily results from a 15.0% increase in net interest income from $4,430,718 in 2004 to $5,098,305 in 2005, and a modest increase in non interest expenses of less than
1.5%.



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##### Table of Contents

On September 30, 2005, Surrey Bancorps assets totaled $171,041,300 compared to $157,292,940 on December 31, 2004. Net loans were $141,994,586
compared to $133,046,165 on December 31, 2004. This growth was primarily in the commercial loan area which has increased 9.1% over December 2004 totals.



Total deposits on September 30, 2005, were $138,941,803 compared to $126,953,966 at the end of 2004. This increase is attributable to increases in demand deposit and
time deposit accounts. Demand deposits increased 2.1% over 2004 totals. Certificates of deposit increased 22.9% over December 31, 2004 totals, while savings deposits decreased 22.6%.



Common shareholders equity increased by $1,588,046 or 12.8% during the nine months ended September 30, 2005 resulting in a common
stock book value of $11.43 per share, up from $10.26 on December 31, 2004.



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 September 30, 2005 or December 31, 2004.



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 shareholders 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 $3,144,572 consisted of U.S. Governmental Agency obligations with maturities ranging from one to twenty-six months, and GNMA adjustable rate mortgage securities, which
adjust annually.



Loans



Net loans outstanding on September 30, 2005, were $141,994,586 compared to $133,046,165
on December 31, 2004. The Bank maintains a loan portfolio dominated by real estate and commercial loans diversified among various industries. Approximately 39.1% of the Banks loans as of September 30, 2005 are fixed rate loans with
60.9% floating with the Banks prime rate or other appropriate internal or external indices.



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##### Table of Contents

Deposits



Deposits on September 30, 2005, were $138,941,803, compared to $126,953,966 on December 31, 2004. The September total comes from a
base of approximately 10,555 accounts compared to 9,845 accounts at December 31, 2004; a 7.2% increase. Interest-bearing accounts represented 83.8% of the 2005 period-end deposits versus 85.8% at December 31, 2004.



Shareholders 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.
The increased ratios as of September 30, 2005 partially result from the reclassification of certain government guaranteed loans to a lower risk weighting in the calculation of risk weighted assets.



|                              |  |       |   |  |                                              |  
|----------------------------- |  | ----- | - |  | -------------------------------------------- | -
|                              |  | Ratio |   |  | Minimum RequiredFor Capital AdequacyPurposes |  
|September 30, 2005:           |  |       |   |  |                                              |  
|Total Capital                 |  |       |   |  |                                              |  
|(to Risk-Weighted Assets)     |  |       |   |  |                                              |  
|Surrey Bancorp (Consolidated) |  | 12.65 | % |  | 8.0                                          | %
|Surrey Bank & Trust           |  | 11.59 | % |  | 8.0                                          | %
|Tier I Capital                |  |       |   |  |                                              |  
|(to Risk-Weighted Assets)     |  |       |   |  |                                              |  
|Surrey Bancorp (Consolidated) |  | 11.39 | % |  | 4.0                                          | %
|Surrey Bank & Trust           |  | 10.34 | % |  | 4.0                                          | %
|Tier I Capital                |  |       |   |  |                                              |  
|(to Average Assets)           |  |       |   |  |                                              |  
|Surrey Bancorp (Consolidated) |  | 9.26  | % |  | 4.0                                          | %
|Surrey Bank & Trust           |  | 8.41  | % |  | 4.0                                          | %
|                              |  |      
|December 31, 2004:            |  |       |   |  |                                              |  
|Total Capital                 |  |       |   |  |                                              |  
|(to Risk-Weighted Assets)     |  |       |   |  |                                              |  
|Surrey Bancorp (Consolidated) |  | 11.61 | % |  | 8.0                                          | %
|Surrey Bank & Trust           |  | 10.52 | % |  | 8.0                                          | %
|Tier I Capital                |  |       |   |  |                                              |  
|(to Risk-Weighted Assets)     |  |       |   |  |                                              |  
|Surrey Bancorp (Consolidated) |  | 10.36 | % |  | 4.0                                          | %
|Surrey Bank & Trust           |  | 9.26  | % |  | 4.0                                          | %
|Tier I Capital                |  |       |   |  |                                              |  
|(to Average Assets)           |  |       |   |  |                                              |  
|Surrey Bancorp (Consolidated) |  | 8.98  | % |  | 4.0                                          | %
|Surrey Bank & Trust           |  | 8.08  | % |  | 4.0                                          | %



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##### Table of Contents

Asset Quality



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



The provision for loan losses charged to operations was
$275,583 in the first nine months of 2005 compared to $208,662 for the same period in 2004. The reserve for loan losses on September 30, 2005 was $2,279,488 or 1.58% of period end loans. This percentage is derived from total loans.
Approximately $25,307,000 of loans at September 30, 2005 are government guaranteed loans 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 1.80% of outstanding loans.



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 asset 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 loan losses and provide a sound reserve for the loan portfolio.



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.



At September 30, 2005, the Bank had loans totaling approximately $499,793 in nonaccrual status.



Interest Rate 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 funding needs, including deposit withdrawals and commitments, in an
orderly manner without sacrificing earnings. The Bank funds its investing activities, including making loans and purchasing investments, by attracting deposits and utilizing short-term borrowings when necessary.



At September 30, 2005 the liquidity position of the Company was good, with short-term
liquid assets of $14,669,125. Deposit growth was approximately $3,054,000 greater than the growth in loans in the nine months of 2005. During the period the Bank invested in Bank Owned Life Insurance (BOLI) which reduced the net funds growth
produced by deposits and loans. To provide supplemental liquidity, the Bank has six lines of credit with correspondent banks totaling $13,700,000. At September 30, 2005, $500,000 had been borrowed against these lines.



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Additionally, the Bank has a secured borrowing arrangement with the Federal Home Loan Bank. The maximum credit available under this agreement approximates
$17,165,000 at September 30, 2005. Advances taken down against the Federal Home Loan Bank line amounted to $12,950,000 at September 30, 2005. In addition, Freedom Finance, LLC has a secured revolving line of credit with another commercial
bank in the amount of $2,000,000. At September 30, 2005 no balance was due on this line.



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##### Table of Contents

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-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 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                                                   
|        | 
|        |  | None                                                                    
|        | 
|Item 3. |  | Defaults Upon Senior Securities                                         
|        | 
|        |  | Not Applicable                                                          
|        | 
|Item 4. |  | Submission of Matters to a Vote of Security Holders                     
|        | 
|        |  | None                                                                    
|        | 
|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-Ks filed August 9, 2005                  



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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: November 10, 2005 |  | /s/ Edward C. Ashby, III                      
|                        |  | Edward C. Ashby, III                          
|                        |  | President and Chief Executive Officer         
|                        | 
|Date: November 10, 2005 |  | /s/ Mark H. Towe                              
|                        |  | Mark H. Towe                                  
|                        |  | Sr. Vice President and Chief Financial Officer



21