##### 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 June 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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈



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



On August 9, 2005, there were 1,225,326 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 June 30, 2005 (Unaudited) and December 31, 2004                                     |  | 3    
|                                                                                                                | 
|Consolidated Statements of Income, Six Months Ended June 30, 2005 and 2004 (Unaudited)                          |  | 4    
|                                                                                                                | 
|Consolidated Statements of Income, Three Months Ended June 30, 2005 and 2004 (Unaudited)                        |  | 5    
|                                                                                                                | 
|Consolidated Statements of Cash Flows, Six Months Ended June 30, 2005 and 2004 (Unaudited)                      |  | 6    
|                                                                                                                | 
|Consolidated Statements of Changes in Shareholders Equity, Six Months Ended June 30, 2005 and 2004 (Unaudited) |  | 7    
|                                                                                                                | 
|Notes to Consolidated Financial Statements                                                                      |  | 8-12 
|                                                                                                                | 
|Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations                   |  | 13-17
|                                                                                                                | 
|Item 3.
Controls and Procedures                                                                                 |  | 18   
|                                                                                                                | 
|PART II  OTHER INFORMATION                                                                                     |  | 19   
|                                                                                                                | 
|Item 6.
Exhibits and Reports on Form 8-K                                                                        |  | 19   
|                                                                                                                | 
|Exhibits                                                                                                        |  |      
|                                                                                                                | 
|10.1 Executive Salary Continuation Agreement for Edward C. Ashby, III                                           |  | 20-29
|10.2 Executive Salary Continuation Agreement for Brenda J. Harding                                              |  | 30-39
|10.3 Executive Salary Continuation Agreement for Pedro A. Pequeno, II                                           |  | 40-49
|10.4 Executive Salary Continuation Agreement for Mark H. Towe                                                   |  | 50-59
|                                                                                                                | 
|SIGNATURES                                                                                                      |  | 19   
|                                                                                                                | 
|CERTIFICATIONS                                                                                                  |  | 60-63



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##### Table of Contents

|                                                                                                                                                                                                                         |  |           |             |   |               |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------- | ----------- | - | ------------- | - | ----------- | -
|Consolidated Balance Sheets June 30, 2005 and December 31, 2004                                                                                                                                                          |  |           | Unaudited   |   |               |   | Audited     |  
|                                                                                                                                                                                                                         |  |          
|                                                                                                                                                                                                                         |  | June 2005 |             |   | December 2004 |  
|Assets                                                                                                                                                                                                                   |  |           |             |   |               |   |             |  
|                                                                                                                                                                                                                         |  |          
|Cash and due from banks                                                                                                                                                                                                  |  | $         | 2,238,501   |   |               | $ | 1,810,543   |  
|Interest-bearing deposits with banks                                                                                                                                                                                     |  |           | 13,532,170  |   |               |   | 12,759,356  |  
|Federal funds sold                                                                                                                                                                                                       |  |           | 502,000     |   |               |   | 301,000     |  
|Investment securities available for sale                                                                                                                                                                                 |  |           | 3,164,131   |   |               |   | 2,692,151   |  
|Restricted equity securities                                                                                                                                                                                             |  |           | 1,007,130   |   |               |   | 790,660     |  
|Loans, net of allowance of loan losses of $2,290,043 in 2005 and $2,294,131 in 2004                                                                                                                                      |  |           | 143,164,449 |   |               |   | 133,046,165 |  
|Property and equipment, net                                                                                                                                                                                              |  |           | 4,458,971   |   |               |   | 4,232,424   |  
|Accrued income                                                                                                                                                                                                           |  |           | 761,358     |   |               |   | 583,365     |  
|Goodwill                                                                                                                                                                                                                 |  |           | 120,000     |   |               |   | 120,000     |  
|Bank owned life insurance                                                                                                                                                                                                |  |           | 2,686,596   |   |               |   |            |  
|Other assets                                                                                                                                                                                                             |  |           | 1,492,682   |   |               |   | 957,276     |  
|                                                                                                                                                                                                                         |  |           |             |   |               |   |             |  
|                                                                                                                                                                                                                         |  | $         | 173,127,988 |   |               | $ | 157,292,940 |  
|                                                                                                                                                                                                                         |  |           |             |   |               |   |             |  
|Liabilities and Shareholders Equity                                                                                                                                                                                     |  |           |             |   |               |   |             |  
|                                                                                                                                                                                                                         |  |          
|Liabilities:                                                                                                                                                                                                             |  |           |             |   |               |   |             |  
|Deposits:                                                                                                                                                                                                                |  |           |             |   |               |   |             |  
|Noninterest-bearing                                                                                                                                                                                                      |  | $         | 23,772,347  |   |               | $ | 18,201,595  |  
|Interest-bearing                                                                                                                                                                                                         |  |           | 117,293,120 |   |               |   | 108,752,371 |  
|                                                                                                                                                                                                                         |  |           |             |   |               |   |             |  
|Total deposits                                                                                                                                                                                                           |  |           | 141,065,467 |   |               |   | 126,953,966 |  
|                                                                                                                                                                                                                         |  |          
|Federal funds purchased and securities sold under agreements to repurchase                                                                                                                                               |  |           | 376,281     |   |               |   | 3,447,823   |  
|Long-term debt                                                                                                                                                                                                           |  |           | 14,496,738  |   |               |   | 11,298,952  |  
|Dividends payable on preferred stock                                                                                                                                                                                     |  |           | 29,742      |   |               |   | 29,987      |  
|Accrued interest payable                                                                                                                                                                                                 |  |           | 274,172     |   |               |   | 161,103     |  
|Other liabilities                                                                                                                                                                                                        |  |           | 893,683     |   |               |   | 355,688     |  
|                                                                                                                                                                                                                         |  |           |             |   |               |   |             |  
|                                                                                                                                                                                                                         |  |           | 157,136,083 |   |               |   | 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 1,225,326 shares issued in 2005 and 1,211,008 shares issued in 2004.                                                                                           |  |           | 8,184,871   |   |               |   | 8,100,261   |  
|Retained earnings                                                                                                                                                                                                        |  |           | 5,200,576   |   |               |   | 4,337,224   |  
|Accumulated other comprehensive income (loss)                                                                                                                                                                            |  |           | (13,867     | ) |               |   | (12,389     | )
|                                                                                                                                                                                                                         |  |           |             |   |               |   |             |  
|                                                                                                                                                                                                                         |  |           | 15,991,905  |   |               |   | 15,045,421  |  
|                                                                                                                                                                                                                         |  |           |             |   |               |   |             |  
|                                                                                                                                                                                                                         |  | $         | 173,127,988 |   |               | $ | 157,292,940 |  
|                                                                                                                                                                                                                         |  |           |             |   |               |   |             |  



See Notes to Consolidated
Financial Statements.



3



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##### Table of Contents

|                                                                          |  |                           |           |   |      |   |           |  
|------------------------------------------------------------------------- |  | ------------------------- | --------- | - | ---- | - | --------- | -
|Consolidated Statements of Income Six months ended June 30, 2005 and 2004 |  |                           |           |   |      |   | Unaudited |  
|                                                                          | 
|                                                                          |  | Six months ended June 30, |          
|                                                                          |  | 2005                      |           |   | 2004 |  
|Interest income:                                                          |  |                           |           |   |      |   |           |  
|Loans and fees on loans                                                   |  | $                         | 4,724,728 |   |      | $ | 3,971,650 |  
|Federal funds sold                                                        |  |                           | 5,721     |   |      |   |          |  
|Investment securities, taxable                                            |  |                           | 60,056    |   |      |   | 41,533    |  
|Investment securities, non taxable                                        |  |                           |          |   |      |   | 456       |  
|Deposits with banks                                                       |  |                           | 112,942   |   |      |   | 29,263    |  
|                                                                          |  |                           |           |   |      |   |           |  
|                                                                          |  |                           | 4,903,447 |   |      |   | 4,042,902 |  
|                                                                          |  |                           |           |   |      |   |           |  
|Interest expense:                                                         |  |                           |           |   |      |   |           |  
|Deposits                                                                  |  |                           | 1,388,620 |   |      |   | 975,248   |  
|Federal funds purchased                                                   |  |                           | 1,108     |   |      |   | 1,697     |  
|Securities sold under agreements to repurchase                            |  |                           | 6,304     |   |      |   | 1,295     |  
|Short-term borrowings                                                     |  |                           |          |   |      |   | 5,291     |  
|Long-term borrowings                                                      |  |                           | 227,463   |   |      |   | 112,931   |  
|                                                                          |  |                           |           |   |      |   |           |  
|                                                                          |  |                           | 1,623,495 |   |      |   | 1,096,462 |  
|                                                                          |  |                           |           |   |      |   |           |  
|Net interest income                                                       |  |                           | 3,279,952 |   |      |   | 2,946,440 |  
|                                                                          |  |                          
|Provision for loan losses                                                 |  |                           | 172,681   |   |      |   | 126,643   |  
|                                                                          |  |                           |           |   |      |   |           |  
|Net interest income after provision for loan losses                       |  |                           | 3,107,271 |   |      |   | 2,819,797 |  
|                                                                          |  |                           |           |   |      |   |           |  
|Noninterest income:                                                       |  |                           |           |   |      |   |           |  
|Service charges on deposit accounts                                       |  |                           | 459,631   |   |      |   | 458,060   |  
|Gain and fees from sale of mortgage servicing rights                      |  |                           |          |   |      |   | 501,610   |  
|Other service charges and fees                                            |  |                           | 170,826   |   |      |   | 221,139   |  
|Other operating income                                                    |  |                           | 265,321   |   |      |   | 217,856   |  
|                                                                          |  |                           |           |   |      |   |           |  
|                                                                          |  |                           | 895,778   |   |      |   | 1,398,665 |  
|                                                                          |  |                           |           |   |      |   |           |  
|Noninterest expense:                                                      |  |                           |           |   |      |   |           |  
|Salaries and employee benefits                                            |  |                           | 1,228,786 |   |      |   | 1,288,198 |  
|Occupancy expense                                                         |  |                           | 171,956   |   |      |   | 170,080   |  
|Equipment expense                                                         |  |                           | 182,692   |   |      |   | 232,437   |  
|Data processing                                                           |  |                           | 175,396   |   |      |   | 179,634   |  
|Other expense                                                             |  |                           | 759,713   |   |      |   | 630,531   |  
|                                                                          |  |                           |           |   |      |   |           |  
|                                                                          |  |                           | 2,518,543 |   |      |   | 2,500,880 |  
|                                                                          |  |                           |           |   |      |   |           |  
|Net income before income taxes                                            |  |                           | 1,484,506 |   |      |   | 1,717,582 |  
|                                                                          |  |                          
|Income tax expense                                                        |  |                           | 561,996   |   |      |   | 664,200   |  
|                                                                          |  |                           |           |   |      |   |           |  
|Net income                                                                |  |                           | 922,510   |   |      |   | 1,053,382 |  
|                                                                          |  |                          
|Preferred stock dividend declared                                         |  |                           | (59,158   | ) |      |   | (59,305   | )
|                                                                          |  |                           |           |   |      |   |           |  
|Net income available for common shareholders                              |  | $                         | 863,352   |   |      | $ | 994,077   |  
|                                                                          |  |                           |           |   |      |   |           |  
|Basic earnings per share                                                  |  | $                         | 0.71      |   |      | $ | 0.84      |  
|                                                                          |  |                           |           |   |      |   |           |  
|Diluted earnings per share                                                |  | $                         | 0.62      |   |      | $ | 0.73      |  
|                                                                          |  |                           |           |   |      |   |           |  
|Basic weighted average shares outstanding                                 |  |                           | 1,215,718 |   |      |   | 1,188,709 |  
|                                                                          |  |                           |           |   |      |   |           |  
|Diluted weighted average shares outstanding                               |  |                           | 1,477,764 |   |      |   | 1,450,297 |  
|                                                                          |  |                           |           |   |      |   |           |  



See Notes to Consolidated
Financial Statements.



4



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##### Table of Contents

|                                                                            |  |                             |           |   |      |   |           |  
|--------------------------------------------------------------------------- |  | --------------------------- | --------- | - | ---- | - | --------- | -
|Consolidated Statements of Income Three months ended June 30, 2005 and 2004 |  |                             |           |   |      |   | Unaudited |  
|                                                                            | 
|                                                                            |  | Three months ended June 30, |          
|                                                                            |  | 2005                        |           |   | 2004 |  
|Interest income:                                                            |  |                             |           |   |      |   |           |  
|Loans and fees on loans                                                     |  | $                           | 2,470,411 |   |      | $ | 2,010,717 |  
|Federal funds sold                                                          |  |                             | 3,542     |   |      |   |          |  
|Investment securities, taxable                                              |  |                             | 33,669    |   |      |   | 18,929    |  
|Investment securities, non taxable                                          |  |                             |          |   |      |   |          |  
|Deposits with banks                                                         |  |                             | 52,825    |   |      |   | 25,286    |  
|                                                                            |  |                             |           |   |      |   |           |  
|                                                                            |  |                             | 2,560,447 |   |      |   | 2,054,932 |  
|                                                                            |  |                             |           |   |      |   |           |  
|Interest expense:                                                           |  |                             |           |   |      |   |           |  
|Deposits                                                                    |  |                             | 738,358   |   |      |   | 515,525   |  
|Federal funds purchased                                                     |  |                             | 444       |   |      |   |          |  
|Securities sold under agreements to repurchase                              |  |                             | 4,194     |   |      |   | 533       |  
|Short-term borrowings                                                       |  |                             |          |   |      |   | 1,256     |  
|Long-term borrowings                                                        |  |                             | 118,117   |   |      |   | 62,530    |  
|                                                                            |  |                             |           |   |      |   |           |  
|                                                                            |  |                             | 861,113   |   |      |   | 579,844   |  
|                                                                            |  |                             |           |   |      |   |           |  
|Net interest income                                                         |  |                             | 1,699,334 |   |      |   | 1,475,088 |  
|                                                                            |  |                            
|Provision for loan losses                                                   |  |                             | 52,675    |   |      |   | 41,484    |  
|                                                                            |  |                             |           |   |      |   |           |  
|Net interest income after provision for loan losses                         |  |                             | 1,646,659 |   |      |   | 1,433,604 |  
|                                                                            |  |                             |           |   |      |   |           |  
|Noninterest income:                                                         |  |                             |           |   |      |   |           |  
|Service charges on deposit accounts                                         |  |                             | 235,104   |   |      |   | 241,715   |  
|Gain and fees from the sale of mortgage servicing rights                    |  |                             |          |   |      |   | 501,610   |  
|Other service charges and fees                                              |  |                             | 86,834    |   |      |   | 91,996    |  
|Other operating income                                                      |  |                             | 111,431   |   |      |   | 70,582    |  
|                                                                            |  |                             |           |   |      |   |           |  
|                                                                            |  |                             | 433,369   |   |      |   | 905,903   |  
|                                                                            |  |                             |           |   |      |   |           |  
|Noninterest expense:                                                        |  |                             |           |   |      |   |           |  
|Salaries and employee benefits                                              |  |                             | 592,337   |   |      |   | 651,319   |  
|Occupancy expense                                                           |  |                             | 86,193    |   |      |   | 89,916    |  
|Equipment expense                                                           |  |                             | 92,731    |   |      |   | 118,920   |  
|Data processing                                                             |  |                             | 87,763    |   |      |   | 88,199    |  
|Other expense                                                               |  |                             | 380,531   |   |      |   | 344,156   |  
|                                                                            |  |                             |           |   |      |   |           |  
|                                                                            |  |                             | 1,239,555 |   |      |   | 1,292,510 |  
|                                                                            |  |                             |           |   |      |   |           |  
|Net income before income taxes                                              |  |                             | 840,473   |   |      |   | 1,046,997 |  
|                                                                            |  |                            
|Income tax expense                                                          |  |                             | 313,972   |   |      |   | 405,900   |  
|                                                                            |  |                             |           |   |      |   |           |  
|Net income                                                                  |  |                             | 526,501   |   |      |   | 641,097   |  
|                                                                            |  |                            
|Preferred stock dividend declared                                           |  |                             | (29,742   | ) |      |   | (29,653   | )
|                                                                            |  |                             |           |   |      |   |           |  
|Net income available for common shareholders                                |  | $                           | 496,759   |   |      | $ | 611,444   |  
|                                                                            |  |                             |           |   |      |   |           |  
|Basic earnings per share                                                    |  | $                           | 0.41      |   |      | $ | 0.51      |  
|                                                                            |  |                             |           |   |      |   |           |  
|Diluted earnings per share                                                  |  | $                           | 0.36      |   |      | $ | 0.44      |  
|                                                                            |  |                             |           |   |      |   |           |  
|Basic weighted average shares outstanding                                   |  |                             | 1,220,251 |   |      |   | 1,196,407 |  
|                                                                            |  |                             |           |   |      |   |           |  
|Diluted weighted average shares outstanding                                 |  |                             | 1,472,039 |   |      |   | 1,460,659 |  
|                                                                            |  |                             |           |   |      |   |           |  



See Notes to Consolidated
Financial Statements.



5



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##### Table of Contents

|                                                                                       |  |                           |             |   |      |   |             |  
|-------------------------------------------------------------------------------------- |  | ------------------------- | ----------- | - | ---- | - | ----------- | -
|Consolidated Statements of Cash Flows Six months ended June 30, 2005 and
2004          |  |                           |             |   |      |   | Unaudited   |  
|                                                                                       | 
|                                                                                       |  | Six months ended June 30, |            
|                                                                                       |  | 2005                      |             |   | 2004 |  
|Cash flows from operating activities:                                                  |  |                           |             |   |      |   |             |  
|Net income                                                                             |  | $                         | 922,510     |   |      | $ | 1,053,382   |  
|Adjustments to reconcile net income to net cash provided by operations:                |  |                           |             |   |      |   |             |  
|Depreciation and amortization                                                          |  |                           | 168,629     |   |      |   | 195,094     |  
|Loss on the sale/abandonment of fixed assets                                           |  |                           | 3,813       |   |      |   |            |  
|Provision for loan losses                                                              |  |                           | 172,681     |   |      |   | 126,643     |  
|Deferred income taxes                                                                  |  |                           | (10,304     | ) |      |   |            |  
|Accretion of discount on securities, net of amortization of premiums                   |  |                           | (18,201     | ) |      |   | (6,156      | )
|Increase in cash surrender value of life insurance                                     |  |                           | (36,596     | ) |      |   |            |  
|Changes in assets and liabilities:                                                     |  |                           |             |   |      |   |             |  
|Accrued income                                                                         |  |                           | (177,993    | ) |      |   | 33,561      |  
|Other assets                                                                           |  |                           | (524,174    | ) |      |   | (456,151    | )
|Accrued interest payable                                                               |  |                           | 113,069     |   |      |   | 16,386      |  
|Other liabilities                                                                      |  |                           | 537,995     |   |      |   | 441,376     |  
|                                                                                       |  |                           |             |   |      |   |             |  
|Net cash provided by operating activities                                              |  |                           | 1,151,429   |   |      |   | 1,404,135   |  
|                                                                                       |  |                           |             |   |      |   |             |  
|Cash flows from investing activities:                                                  |  |                           |             |   |      |   |             |  
|Net increase in interest-bearing deposits with banks                                   |  |                           | (772,814    | ) |      |   | (15,244,291 | )
|Net increase in federal funds sold                                                     |  |                           | (201,000    | ) |      |   |            |  
|Purchase of investment securities                                                      |  |                           | (3,481,285  | ) |      |   | (2,495,797  | )
|Sales and maturities of investment securities                                          |  |                           | 3,025,100   |   |      |   | 4,925,945   |  
|(Purchase) redemption of restricted equity securities                                  |  |                           | (216,470    | ) |      |   | 32,500      |  
|Net increase in loans                                                                  |  |                           | (10,290,965 | ) |      |   | (6,361,857  | )
|Purchases of property and equipment                                                    |  |                           | (398,989    | ) |      |   | (90,843     | )
|Purchase of bank owned life insurance                                                  |  |                           | (2,650,000  | ) |      |   |            |  
|                                                                                       |  |                           |             |   |      |   |             |  
|Net cash used in investing activities                                                  |  |                           | (14,986,423 | ) |      |   | (19,234,343 | )
|                                                                                       |  |                           |             |   |      |   |             |  
|Cash flows from financing activities:                                                  |  |                           |             |   |      |   |             |  
|Net increase in deposits                                                               |  |                           | 14,111,501  |   |      |   | 18,570,698  |  
|Net decrease in fed funds purchased and securities sold under agreements to repurchase |  |                           | (3,071,542  | ) |      |   | (2,841,811  | )
|Net decrease in short-term debt                                                        |  |                           |            |   |      |   | (1,400,000  | )
|Net increase in long-term debt                                                         |  |                           | 3,197,786   |   |      |   | 3,105,912   |  
|Dividends paid on preferred stock                                                      |  |                           | (59,403     | ) |      |   | (59,722     | )
|Common stock options exercised                                                         |  |                           | 84,610      |   |      |   | 152,178     |  
|                                                                                       |  |                           |             |   |      |   |             |  
|Net cash provided by financing activities                                              |  |                           | 14,262,952  |   |      |   | 17,527,255  |  
|                                                                                       |  |                           |             |   |      |   |             |  
|Net increase (decrease) in cash and cash equivalents                                   |  |                           | 427,958     |   |      |   | (302,953    | )
|                                                                                       |  |                          
|Cash and cash equivalents, beginning                                                   |  |                           | 1,810,543   |   |      |   | 1,956,473   |  
|                                                                                       |  |                           |             |   |      |   |             |  
|Cash and cash equivalents, ending                                                      |  | $                         | 2,238,501   |   |      | $ | 1,653,520   |  
|                                                                                       |  |                           |             |   |      |   |             |  
|Supplemental disclosure of cash flow information:                                      |  |                           |             |   |      |   |             |  
|Interest paid                                                                          |  | $                         | 1,510,426   |   |      | $ | 1,080,076   |  
|                                                                                       |  |                           |             |   |      |   |             |  
|Taxes paid                                                                             |  | $                         | 584,574     |   |      | $ | 490,292     |  
|                                                                                       |  |                           |             |   |      |   |             |  



See Notes to Consolidated
Financial Statements.



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##### Table of Contents

|                                                                                                                  |  |                             |  |              |           |                   |           |        |                                                    |           |  |       |           |   |  |   |         |   |  |   |            |  
|----------------------------------------------------------------------------------------------------------------- |  | --------------------------- |  | ------------ | --------- | ----------------- | --------- | ------ | -------------------------------------------------- | --------- |  | ----- | --------- | - |  | - | ------- | - |  | - | ---------- | -
|Consolidated Statements of Changes in Shareholders Equity Six months ended June 30,
2005 and 2004                |  |                             |  | Unaudited    |          
|                                                                                                                  |  |                             |  |              |          
|                                                                                                                  |  | Convertible Preferred Stock |  | Common Stock |           | Retained Earnings |           |        | 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                                                                                                        |  |                             |  |              |           |                   |           |        |                                                    |           |  |       | 1,053,382 |   |  |   |         |   |  |   | 1,053,382  |  
|Change in unrealized appreciation on investment securities available for sale, net of income taxes of $12,127     |  |                             |  |              |           |                   |           |        |                                                    |           |  |       |           |   |  |   | (19,330 | ) |  |   | (19,330    | )
|                                                                                                                  |  |                             |  |              |           |                   |           |        |                                                    |           |  |       |           |   |  |   |         |   |  |   |            |  
|Total comprehensive income                                                                                        |  |                             |  |              |           |                   |           |        |                                                    |           |  |       |           |   |  |   |         |   |  |   | 1,034,052  |  
|                                                                                                                  |  |                             |  |              |           |                   |          
|Common stock issued                                                                                               |  |                             |  |              |           |                   |           |        |                                                    |           |  |       |           |   |  |   |         |   |  |   |            |  
|Common stock options exercised                                                                                    |  |                             |  |              |           |                   | 26,218    |        |                                                    | 152,178   |  |       |           |   |  |   |         |   |  |   | 152,178    |  
|                                                                                                                  |  |                             |  |              |           |                   |          
|Dividends declared on convertible preferred stock                                                                 |  |                             |  |              |           |                   |           |        |                                                    |           |  |       | (59,305   | ) |  |   |         |   |  |   | (59,305    | )
|                                                                                                                  |  |                             |  |              |           |                   |           |        |                                                    |           |  |       |           |   |  |   |         |   |  |   |            |  
|Balance, June 30, 2004                                                                                            |  | 189,356                     |  | $            | 2,620,325 |                   | 1,196,407 |        | $                                                  | 7,974,565 |  | $     | 3,621,606 |   |  | $ | (16,105 | ) |  | $ | 14,200,391 |  
|                                                                                                                  |  |                             |  |              |           |                   |           |        |                                                    |           |  |       |           |   |  |   |         |   |  |   |            |  
|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                                                                                                        |  |                             |  |              |           |                   |           |        |                                                    |           |  |       | 922,510   |   |  |   |         |   |  |   | 922,510    |  
|Change in unrealized depreciation on investment securities available for sale, net of income tax benefits of $927 |  |                             |  |              |           |                   |           |        |                                                    |           |  |       |           |   |  |   | (1,478  | ) |  |   | (1,478     | )
|                                                                                                                  |  |                             |  |              |           |                   |           |        |                                                    |           |  |       |           |   |  |   |         |   |  |   |            |  
|Total comprehensive income                                                                                        |  |                             |  |              |           |                   |           |        |                                                    |           |  |       |           |   |  |   |         |   |  |   | 921,032    |  
|                                                                                                                  |  |                             |  |              |           |                   |          
|Common stock issued                                                                                               |  |                             |  |              |           |                   |           |        |                                                    |           |  |       |           |   |  |   |         |   |  |   |            |  
|Common stock options exercised                                                                                    |  |                             |  |              |           |                   | 14,318    |        |                                                    | 84,610    |  |       |           |   |  |   |         |   |  |   | 84,610     |  
|                                                                                                                  |  |                             |  |              |           |                   |          
|Dividends declared on convertible preferred stock                                                                 |  |                             |  |              |           |                   |           |        |                                                    |           |  |       | (59,158   | ) |  |   |         |   |  |   | (59,158    | )
|                                                                                                                  |  |                             |  |              |           |                   |           |        |                                                    |           |  |       |           |   |  |   |         |   |  |   |            |  
|Balance, June 30, 2005                                                                                            |  | 189,356                     |  | $            | 2,620,325 |                   | 1,225,326 |        | $                                                  | 8,184,871 |  | $     | 5,200,576 |   |  | $ | (13,867 | ) |  | $ | 15,991,905 |  
|                                                                                                                  |  |                             |  |              |           |                   |           |        |                                                    |           |  |       |           |   |  |   |         |   |  |   |            |  



See Notes to Consolidated
Financial Statements.



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##### Table of Contents

SURREY BANCORP

NOTES TO FINANCIAL STATEMENTS



NOTE 1. BASIS OF PRESENTATION



The accompanying unaudited financial statements were prepared in accordance with
instructions for Form 10-QSB and therefore, do not include all disclosures required by generally accepted accounting principles for a complete presentation of financial statements. In the opinion of management, the financial statements contain all
adjustments necessary to present fairly the financial condition of Surrey Bancorp as of June 30, 2005 and December 31, 2004, the results of operations for the six and three months ended June 30, 2005 and 2004, and its changes in stockholders
equity and cash flows for the six months ended June 30, 2005 and 2004. All adjustments are of a normal and recurring nature. The results of operations for the six months ended June 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.



8



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



Loans Receivable



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



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



Activity in the allowance for loan losses for the six months ended June 30, 2005 and 2004 follows:



|                                 |  |          |           |   |      |   |           |  
|-------------------------------- |  | -------- | --------- | - | ---- | - | --------- | -
|                                 |  | June 30, |          
|                                 |  | 2005     |           |   | 2004 |  
|Balance at beginning of year     |  | $        | 2,294,131 |   |      | $ | 2,109,820 |  
|Add provision charged to expense |  |          | 172,681   |   |      |   | 126,643   |  
|Less net charge-offs             |  |          | (176,769  | ) |      |   | (87,352   | )
|                                 |  |          |           |   |      |   |           |  
|                                 |  | $        | 2,290,043 |   |      | $ | 2,149,111 |  
|                                 |  |          |           |   |      |   |           |  



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.



NOTE 2. EARNINGS PER SHARE



Basic earnings per share for the six and three months ended June 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.



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##### Table of Contents

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 June 30, 2005, the Company had commitments to extend credit, including unused lines of
credit of approximately $26,389,000. Letters of credit totaling $1,500,116 were outstanding.



NOTE 5. STOCK OPTION PLANS



The Company
has adopted a qualified incentive stock option plan which reserves, as amended, 64,517 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:



|                                                                               |  |          |         |      |   |        
|------------------------------------------------------------------------------ |  | -------- | ------- | ---- | - | -------
|                                                                               |  | June 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   |  | $        | 852,800 |      | $ | 984,984
|                                                                               |  |          |         |      |   |        
|Pro forma earnings per common share, based on SFAS No. 123                     |  | $        | 0.70    |      | $ | 0.83   
|                                                                               |  |          |         |      |   |        
|Pro forma earnings per fully dilutive common share, based on SFAS No. 123      |  | $        | 0.62    |      | $ | 0.72   
|                                                                               |  |          |         |      |   |        



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##### Table of Contents

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 six months ended June 30, 2005 and 2004 is as follows:



|                                   |  |      |             |                      |   |           |                          |  |   |                     |   |  |   |            
|---------------------------------- |  | ---- | ----------- | -------------------- | - | --------- | ------------------------ |  | - | ------------------- | - |  | - | -----------
|                                   |  | Bank |             | Freedom Finance, LLC |   |           | Intersegment Elimination |  |   | Consolidated Totals
|June 30, 2005                      |  |      |             |                      |   |           |                          |  |   |                     |   |  |   |            
|Net interest income                |  | $    | 3,144,809   |                      | $ | 135,143   |                          |  | $ |                    |   |  | $ | $3,279,952 
|Other revenue  external customers |  |      | 890,733     |                      |   | 5,045     |                          |  |   |                    |   |  |   | 895,778    
|Depreciation and Amortization      |  |      | 167,327     |                      |   | 1,302     |                          |  |   |                    |   |  |   | 168,629    
|Provision for loan losses          |  |      | 172,624     |                      |   | 57        |                          |  |   |                    |   |  |   | 172,681    
|                                   |  |      |             |                     
|Net income                         |  |      | 907,326     |                      |   | 15,184    |                          |  |   |                    |   |  |   | 922,510    
|                                   |  |      |             |                     
|Assets                             |  |      | 189,658,877 |                      |   | 1,674,445 |                          |  |   | (18,205,334         | ) |  |   | 173,127,988
|                                   |  |      |             |                     
|June 30, 2004                      |  |      |             |                      |   |           |                          |  |   |                     |   |  |   |            
|Net interest income                |  | $    | 2,811,164   |                      | $ | 135,276   |                          |  | $ |                    |   |  | $ | $2,946,440 
|Other revenue  external customers |  |      | 1,384,465   |                      |   | 14,200    |                          |  |   |                    |   |  |   | 1,398,665  
|Depreciation and Amortization      |  |      | 193,002     |                      |   | 2,092     |                          |  |   |                    |   |  |   | 195,094    
|Provision for loan losses          |  |      | 148,388     |                      |   | (21,745   | )                        |  |   |                    |   |  |   | 126,643    
|                                   |  |      |             |                     
|Net income                         |  |      | 989,903     |                      |   | 63,479    |                          |  |   |                    |   |  |   | 1,053,382  
|                                   |  |      |             |                     
|Assets                             |  |      | 169,154,141 |                      |   | 1,594,063 |                          |  |   | (16,652,130         | ) |  |   | 154,096,074



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



The Bank derives a majority of its revenue from interest income and relies primarily on net interest income to assess the performance of the segments and
make decisions about resources to be allocated to the segment. Therefore, the segments are reported using net interest income for the period ended June 30, 2005. The Bank does allocate income taxes to the segments. Other revenue represents
noninterest income which is also allocated to the segments. The Bank includes the holding company and an insurance and investment agency in its Bank segment above. The Bank does not have any single external customer from which is derives 10 percent
or more of its revenues and operations in one geographical area.



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##### Table of Contents

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



Introduction



This discussion, analysis and related financial information are presented to explain the significant factors which affected Surrey Bancorps financial condition and
results of operations for the six and three months ending June 30, 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 June 30, 2005, was $496,759 or $.36 per diluted share outstanding compared to a $611,444 or $.44 per diluted share outstanding for the same period in 2004. Earnings for the three months ended June 30, 2005 are
approximately 18.8% lower than for the same period in 2004. The decrease primarily results from a reduction in fee income due to a one time gain of $501,610 earned in 2004 from the sale of the Companys mortgage servicing rights. Exclusive of
this one time gain, non interest income increased 7.2% compared to the same three month period in 2004. Net income available to common shareholders, exclusive of the 2004 one time gain, increased approximately 63.3% compared to the second quarter of
2004. This is generally due to an increase in net interest income from $1,475,088 during the second quarter of 2004 to $1,699,334 for the second quarter of 2005, an increase of 15.2%.



Net income available for common shareholders for the six months ended June 30, 2005, was $863,352 or $.62 per diluted share outstanding
compared to a $994,077 or $.73 per diluted share outstanding for the same period in 2004. Earnings for the six months ended June 30, 2005 are approximately 13.2% lower than for the same period in 2004. The decrease primarily results from a reduction
in fee income due to a one time gain of $501,610 earned in 2004 from the sale of the Companys mortgage servicing rights. Exclusive of this one time gain, non interest income remained relatively flat compared to the same period in 2004. Net
income available to common



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##### Table of Contents

shareholders, exclusive of the 2004 one time gain, increased approximately 25.8%. This is due to an increase in net
interest income of 11.3%, from $2,946,440 in 2004 to $3,279,952 in 2005, and a modest increase in non interest expenses of less than 1.0%.



On June 30, 2005, Surrey Bancorps assets totaled $173,127,988 compared to $157,292,940 on December 31, 2004. Net loans were $143,164,449 compared to $133,046,165 on
December 31, 2004. This growth was primarily in the commercial loan area which increased 9.7% over December 2004 totals.



Total deposits on June 30, 2005, were $141,065,467 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 12.9% over 2004 totals. Certificates of deposit increased 18.4% over December 31, 2004 totals, while savings deposits decreased 17.7%.



Common shareholders equity increased by $946,484 or 6.3% during the six months ended June 30, 2005 resulting in a common stock book
value of $10.91 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 June 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 $3,164,131 consisted of U.S. Governmental Agency obligations with maturities ranging from one to twenty-nine months, and GNMA adjustable rate mortgage securities, which
adjust annually.



Loans



Net loans outstanding on June 30, 2005, were $143,164,449 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 39.5% of the Banks loans as of June 30, 2005 are fixed rate loans with 60.5% floating with
the Banks prime rate or other appropriate internal or external indices.



14



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##### Table of Contents

Deposits



Deposits on June 30, 2005, were $141,065,467, compared to $126,953,966 on December 31, 2004.



The June total comes from a base of approximately 10,426 accounts compared to 9,845 accounts
at December 31, 2004; a 5.9% increase. Interest-bearing accounts represented 83.2% 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.



|                                                                                          |  |            |    |  |                                              |   
|----------------------------------------------------------------------------------------- |  | ---------- | -- |  | -------------------------------------------- | --
|                                                                                          |  | Ratio      |    |  | Minimum RequiredFor Capital AdequacyPurposes |   
|June 30, 2005:                                                                            |  |            |    |  |                                              |   
|                                                                                          |  |           
|Total Capital(to Risk-Weighted Assets) Surrey Bancorp (Consolidated) Surrey Bank & Trust  |  | 11.1410.20 | %% |  | 8.08.0                                       | %%
|                                                                                          |  |           
|Tier I Capital(to Risk-Weighted Assets) Surrey Bancorp (Consolidated) Surrey Bank & Trust |  | 9.888.94   | %% |  | 4.04.0                                       | %%
|                                                                                          |  |           
|Tier I Capital(to Average Assets) Surrey Bancorp (Consolidated) Surrey Bank & Trust       |  | 9.128.25   | %% |  | 4.04.0                                       | %%
|                                                                                          |  |           
|December 31, 2004:                                                                        |  |            |    |  |                                              |   
|                                                                                          |  |           
|Total Capital(to Risk-Weighted Assets) Surrey Bancorp (Consolidated) Surrey Bank & Trust  |  | 11.6110.52 | %% |  | 8.08.0                                       | %%
|                                                                                          |  |           
|Tier I Capital(to Risk-Weighted Assets) Surrey Bancorp (Consolidated) Surrey Bank & Trust |  | 10.369.26  | %% |  | 4.04.0                                       | %%
|                                                                                          |  |           
|Tier I Capital(to Average Assets) Surrey Bancorp (Consolidated) Surrey Bank & Trust       |  | 8.988.08   | %% |  | 4.04.0                                       | %%



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Asset Quality



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



The provision for loan losses charged to operations was $172,681 in
the first six months of 2005 compared to $126,643 for the same period in 2004. The reserve for loan losses on June 30, 2005 was $2,290,043 or 1.57% of period end loans. This percentage is derived from total loans. Approximately $28,733,000 of loans
at June 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 1.83%
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 June 30, 2005, the Bank had loans totaling approximately $860,097 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 June 30, 2005 the liquidity position of the Company was good, with short-term liquid assets of $16,272,671. Deposit growth was approximately $3,997,000 greater than
the growth in loans in the six months of 2005 resulting in a slightly more liquid position compared to December 31, 2004. 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. There were no outstanding advances against these lines at June 30, 2005. Additionally, the Bank has a secured borrowing



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##### Table of Contents

arrangement with the Federal Home Loan Bank. The maximum credit available under this agreement approximates $18,578,000
at June 30, 2005. Advances taken down against the Federal Home Loan Bank line amounted to $14,450,000 at June 30, 2005. In addition, Freedom Finance, LLC has a secured revolving line of credit with another commercial bank in the amount of
$1,200,000. At June 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



10.1 Executive Salary Continuation
Agreement for Edward C. Ashby, III



10.2 Executive Salary
Continuation Agreement for Brenda J. Harding



10.3 Executive
Salary Continuation Agreement for Pedro A. Pequeno, II



10.4
Executive Salary Continuation Agreement for Mark H. Towe



31.1
Certification



31.2 Certification



32.    Certification



(b.) Reports on 8-K



Incorporated by Reference to 8-Ks filed April 29, 2005 and June 27, 2005



SIGNATURES



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



|                      |  |                                               
|--------------------- |  | ----------------------------------------------
|                      |  | Surrey Bancorp                                
|                      | 
|Date: August 11, 2005 |  | /s/ Edward C. Ashby, III                      
|                      |  | Edward C. Ashby, III                          
|                      |  | President and Chief Executive Officer         
|                      | 
|Date: August 11, 2005 |  | /s/ Mark H. Towe                              
|                      |  | Mark H. Towe                                  
|                      |  | Sr. Vice President and Chief Financial Officer



19