2004 Annual Report



Table of Contents



|                                                |  |   
|----------------------------------------------- |  | --
|Letter to Stockholders                          |  | 1 
|                                                | 
|Financial Highlights                            |  | 2 
|                                                | 
|Consolidated Balance Sheets                     |  | 3 
|                                                | 
|Consolidated Statements of Income               |  | 4 
|                                                | 
|Consolidated Statements of Stockholders Equity |  | 5 
|                                                | 
|Consolidated Statements of Cash Flows           |  | 7 
|                                                | 
|Notes to Consolidated Financial Statements      |  | 9 
|                                                | 
|Independent Auditors Report                    |  | 36
|                                                | 
|Managements Discussion and Analysis            |  | 37
|                                                | 
|Board of Directors and Officers                 |  | 51
|                                                | 
|Stockholder Information                         |  | 52





---

Dear Shareholder:



It is my pleasure to present you with the 2004 financial report for Surrey Bancorp. In its eight years of operation, the Company has become a strong competitor in the
financial services market in our communities. The Companys Board of Directors, management and employees of the bank and its subsidiary operations remain focused on supporting the financial needs of our market area and increasing shareholder
value.



Growth rates in 2004 were in line with expectations. Total assets at
year-end 2004 were $157,292,940, a 16% increase from 2003 year-end assets of $135,077,005. The Company experienced solid loan growth in 2004, primarily in the commercial lending area. Net loans at year-end totaled $133,046,135, compared to
$117,362,619 at year-end 2003, an increase of 13%. Non-performing loans at the end of 2004 totaled .93% of gross loans outstanding. Surrey Bank made contributions of $325,032 to loan loss reserves in 2004, resulting in total reserves of $2,294,131.
The provision for loan loss totaled 1.7% of outstanding loans. Deposits increased in 2004 to $126,953,966, a 14% increase from 2003 year-end deposits of $111,277,876.



Surrey Bancorp posted record earnings in 2004. Net income prior to payment of preferred dividends was $1,828,972, compared to $1,261,385 in
2003, a 45% increase. Net interest income after provisions for loan loss increased 10% in 2004 to $5,549,268. This improvement was due to growth in the loan portfolio. The low interest rate environment in 2004 continued to put pressure on the
companys interest margin. Net yield on earnings assets at year-end 2004 was 4.04% versus 4.75% in 2003. Non-interest income increased substantially in 2004 to $2,436,776, a 17% increase over 2003. The company had non-recurring income from the
sale of mortgage loan servicing rights and recognition of deferred fees related to that sale during the second quarter of 2004 in the amount of $510,601. The mortgage lending operation has been a major contributor to non-interest income over the
past two years. However, forecasted increases in interest rates in 2005 could reduce profitability in the mortgage lending area, which will have a negative effect on non-interest income. Non-interest expense for the company was $5,158,348, a 1%
increase from 2003. Discontinuance of secondary market operations in the mortgage lending area contributed to cost containment efforts. In 2004, return on average assets was 1.21% and return on average equity was 12.85%. These profitability measures
are above peer banks in North Carolina.



In the past year, the Company focused
on growth within its existing branch network, improving product offerings, and strengthening operating procedures. The branch on Highway 601 in Mount Airy and the temporary branch on Heatherly Lane in Pilot Mountain ended their first full year of
operation with growth rates that met expectations. Construction of a permanent branch location on Key Street in Pilot Mountain is underway and should be completed in the third quarter of 2005. Other improvements included the successful introduction
of Online Banking in the second quarter of 2004 and development and implementation of credit review functions.



Subsidiary operations have also been improved. Friendly Finance, LLC, our sales finance company, discontinued purchasing loan contracts in 2003. In 2004, it relocated its office to 165 North Renfro Street in Mount
Airy, changed its name to Freedom Finance, LLC (effective January 1, 2005), and began purchasing installment loan contracts. SB&T Insurance, our property and casualty insurance company, added personnel to strengthen internal operating procedures
and a commercial lines producer to increase revenues.



As we enter 2005, we
remain focused on growth within our existing market area. We will also continue to improve operating efficiencies and service levels. We believe our continued commitment to these strategies will ensure a stable and profitable future for the Company.



On behalf of the Board of Directors, management and employees of Surrey
Bancorp, thank you for your support.



|                                    
|------------------------------------
|                                    
|LOGO                                
|Edward C. Ashby, III President & CEO



1



---

Financial Highlights Summary1



|                                                              |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------ | - |  | - | ------ | -
|                                                              |  | 2004 |         |   | 2003 |   |         | 2002 |  |   | 2001    |   |  | 2000 |       
|Summary of Operations                                         |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Interest income                                               |  | $    | 8,307   |   |      | $ | 7,384   |      |  | $ | 6,676   |   |  | $    | 6,405  |   |  | $ | 5,289  |  
|Interest expense                                              |  |      | 2,433   |   |      |   | 1,965   |      |  |   | 2,096   |   |  |      | 2,963  |   |  |   | 2,569  |  
|                                                              |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Net interest income                                           |  |      | 5,874   |   |      |   | 5,419   |      |  |   | 4,580   |   |  |      | 3,442  |   |  |   | 2,720  |  
|Provision for credit losses                                   |  |      | 325     |   |      |   | 378     |      |  |   | 651     |   |  |      | 450    |   |  |   | 212    |  
|Other income                                                  |  |      | 2,437   |   |      |   | 2,088   |      |  |   | 1,471   |   |  |      | 1,083  |   |  |   | 499    |  
|Other expense                                                 |  |      | 5,158   |   |      |   | 5,110   |      |  |   | 3,604   |   |  |      | 3,055  |   |  |   | 2,264  |  
|Income taxes                                                  |  |      | 999     |   |      |   | 758     |      |  |   | 640     |   |  |      | 340    |   |  |   | 203    |  
|Minority interest                                             |  |      |        |   |      |   |        |      |  |   | (109    | ) |  |      | (163   | ) |  |   | (53    | )
|                                                              |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Net income                                                    |  |      | 1,829   |   |      |   | 1,261   |      |  |   | 1,047   |   |  |      | 517    |   |  |   | 487    |  
|Preferred stock dividends declared                            |  |      | (119    | ) |      |   | (66     | )    |  |   |        |   |  |      |       |   |  |   |       |  
|                                                              |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Net income available to common stockholders                   |  | $    | 1,710   |   |      | $ | 1,195   |      |  | $ | 1,047   |   |  | $    | 517    |   |  | $ | 487    |  
|                                                              |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|                                                              |  |      |         |   |     
|Per Common Share Data2                                        |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|                                                              |  |      |         |   |     
|Net income:                                                   |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|Basic                                                         |  | $    | 1.43    |   |      | $ | 1.04    |      |  | $ | 0.91    |   |  | $    | 0.45   |   |  | $ | 0.48   |  
|Diluted                                                       |  |      | 1.26    |   |      |   | 0.93    |      |  |   | 0.84    |   |  |      | 0.44   |   |  |   | 0.47   |  
|Cash dividends declared                                       |  |      | n/a     |   |      |   | n/a     |      |  |   | n/a     |   |  |      | n/a    |   |  |   | n/a    |  
|Book value per common share                                   |  |      | 10.26   |   |      |   | 8.93    |      |  |   | 7.83    |   |  |      | 7.06   |   |  |   | 6.58   |  
|                                                              |  |      |         |   |     
|Balance Sheet                                                 |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|                                                              |  |      |         |   |     
|Loans, net                                                    |  | $    | 133,046 |   |      | $ | 117,363 |      |  | $ | 85,852  |   |  | $    | 72,619 |   |  | $ | 52,538 |  
|Investment securities                                         |  |      | 2,692   |   |      |   | 5,426   |      |  |   | 4,167   |   |  |      | 4,436  |   |  |   | 3,374  |  
|Total assets                                                  |  |      | 157,293 |   |      |   | 135,077 |      |  |   | 106,545 |   |  |      | 86,824 |   |  |   | 69,296 |  
|Deposits                                                      |  |      | 126,954 |   |      |   | 111,278 |      |  |   | 86,899  |   |  |      | 69,562 |   |  |   | 54,806 |  
|Stockholders equity                                          |  |      | 15,045  |   |      |   | 13,073  |      |  |   | 9,164   |   |  |      | 8,099  |   |  |   | 7,477  |  
|Interest-earning assets                                       |  |      | 151,883 |   |      |   | 129,411 |      |  |   | 102,227 |   |  |      | 82,940 |   |  |   | 65,548 |  
|Interest-bearing liabilities                                  |  |      | 123,499 |   |      |   | 105,183 |      |  |   | 82,552  |   |  |      | 67,055 |   |  |   | 51,386 |  
|                                                              |  |      |         |   |     
|Selected Ratios                                               |  |      |         |   |      |   |         |      |  |   |         |   |  |      |        |   |  |   |        |  
|                                                              |  |      |         |   |     
|Return on average assets                                      |  |      | 1.21    | % |      |   | 1.06    | %    |  |   | 1.10    | % |  |      | 0.65   | % |  |   | 0.80   | %
|Return on average equity                                      |  |      | 12.85   | % |      |   | 12.23   | %    |  |   | 11.85   | % |  |      | 6.59   | % |  |   | 8.28   | %
|Dividends declared on common stock as a percent of net income |  |      | n/a     |   |      |   | n/a     |      |  |   | n/a     |   |  |      | n/a    |   |  |   | n/a    |  

---

|1. | In thousands of dollars, except per share data.
|-- | -----------------------------------------------



|2. | Adjusted for the effects of 20% common stock dividend in 1999 and 2000, and a 10% common
stock dividend in 2001, and a 6 for 5 common stock exchange on May 1, 2003.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



2



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Consolidated Balance Sheets

December 31, 2004 and 2003



|                                                                                                                                                                                                          |  |      |             |   |      |   |            
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | -----------
|                                                                                                                                                                                                          |  | 2004 |             |   | 2003
|Assets                                                                                                                                                                                                    |  |      |             |   |      |   |            
|Cash and due from banks                                                                                                                                                                                   |  | $    | 1,810,543   |   |      | $ | 1,956,473  
|Interest-bearing deposits with banks                                                                                                                                                                      |  |      | 12,759,356  |   |      |   | 4,068,017  
|Federal funds sold                                                                                                                                                                                        |  |      | 301,000     |   |      |   |           
|Investment securities available for sale                                                                                                                                                                  |  |      | 2,692,151   |   |      |   | 5,425,973  
|Restricted equity securities                                                                                                                                                                              |  |      | 790,660     |   |      |   | 445,000    
|Loans, net of allowance for loan losses of $2,294,131 in 2004 and $2,109,820 in 2003, respectively                                                                                                        |  |      | 133,046,165 |   |      |   | 117,362,619
|Property and equipment, net                                                                                                                                                                               |  |      | 4,232,424   |   |      |   | 4,281,770  
|Accrued income                                                                                                                                                                                            |  |      | 583,365     |   |      |   | 585,608    
|Goodwill                                                                                                                                                                                                  |  |      | 120,000     |   |      |   | 120,000    
|Other assets                                                                                                                                                                                              |  |      | 957,276     |   |      |   | 831,545    
|                                                                                                                                                                                                          |  |      |             |   |      |   |            
|Total assets                                                                                                                                                                                              |  | $    | 157,292,940 |   |      | $ | 135,077,005
|                                                                                                                                                                                                          |  |      |             |   |      |   |            
|Liabilities and Stockholders Equity                                                                                                                                                                      |  |      |             |   |      |   |            
|Liabilities                                                                                                                                                                                               |  |      |             |   |      |   |            
|Deposits:                                                                                                                                                                                                 |  |      |             |   |      |   |            
|Noninterest-bearing                                                                                                                                                                                       |  | $    | 18,201,595  |   |      | $ | 16,159,584 
|Interest-bearing                                                                                                                                                                                          |  |      | 108,752,371 |   |      |   | 95,118,292 
|                                                                                                                                                                                                          |  |      |             |   |      |   |            
|Total deposits                                                                                                                                                                                            |  |      | 126,953,966 |   |      |   | 111,277,876
|Federal funds purchased and securities sold under agreements to repurchase                                                                                                                                |  |      | 3,447,823   |   |      |   | 3,418,635  
|Short-term debt                                                                                                                                                                                           |  |      |            |   |      |   | 1,400,000  
|Long-term debt                                                                                                                                                                                            |  |      | 11,298,952  |   |      |   | 5,246,080  
|Dividends payable on preferred stock                                                                                                                                                                      |  |      | 29,987      |   |      |   | 30,070     
|Accrued interest payable                                                                                                                                                                                  |  |      | 161,103     |   |      |   | 129,193    
|Other liabilities                                                                                                                                                                                         |  |      | 355,688     |   |      |   | 501,685    
|                                                                                                                                                                                                          |  |      |             |   |      |   |            
|Total liabilities                                                                                                                                                                                         |  |      | 142,247,519 |   |      |   | 122,003,539
|                                                                                                                                                                                                          |  |      |             |   |      |   |            
|Commitments and contingencies                                                                                                                                                                             |  |      |            |   |      |   |           
|Stockholders equity                                                                                                                                                                                      |  |      |             |   |      |   |            
|Preferred stock, 1,000,000 shares authorized, 189,356 shares of Series A, issued and outstanding with no par value, 4.5% convertible
non-cumulative, perpetual; with a liquidation value of $14 per share |  |      | 2,620,325   |   |      |   | 2,620,325  
|Common stock, 5,000,000 shares authorized at no par value; 1,211,008 shares issued in 2004 and 1,170,189 shares issued in 2003                                                                            |  |      | 8,100,261   |   |      |   | 7,822,387  
|Retained earnings                                                                                                                                                                                         |  |      | 4,337,224   |   |      |   | 2,627,529  
|Accumulated other comprehensive income (loss)                                                                                                                                                             |  |      | (12,389     | ) |      |   | 3,225      
|                                                                                                                                                                                                          |  |      |             |   |      |   |            
|Total stockholders equity                                                                                                                                                                                |  |      | 15,045,421  |   |      |   | 13,073,466 
|                                                                                                                                                                                                          |  |      |             |   |      |   |            
|Total liabilities and stockholders equity                                                                                                                                                                |  | $    | 157,292,940 |   |      | $ | 135,077,005
|                                                                                                                                                                                                          |  |      |             |   |      |   |            



See Notes to Consolidated
Financial Statements



3



---

Consolidated Statements of Income

For the years ended December 31, 2004, 2003 and 2002



|                                                                                                   |  |      |           |   |      |   |           |      |  |   |           |  
|-------------------------------------------------------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                                                                   |  | 2004 |           |   | 2003 |   |           | 2002 | 
|Interest income                                                                                    |  |      |           |   |      |   |           |      |  |   |           |  
|Loans and fees on loans                                                                            |  | $    | 8,082,109 |   |      | $ | 7,270,034 |      |  | $ | 6,488,555 |  
|Federal funds sold                                                                                 |  |      | 3,185     |   |      |   |          |      |  |   | 1,005     |  
|Investment securities, taxable                                                                     |  |      | 82,448    |   |      |   | 84,892    |      |  |   | 129,494   |  
|Investment securities, nontaxable                                                                  |  |      | 456       |   |      |   | 2,717     |      |  |   | 3,615     |  
|Deposits with banks                                                                                |  |      | 139,100   |   |      |   | 25,860    |      |  |   | 52,881    |  
|                                                                                                   |  |      |           |   |      |   |           |      |  |   |           |  
|Total interest income                                                                              |  |      | 8,307,298 |   |      |   | 7,383,503 |      |  |   | 6,675,550 |  
|                                                                                                   |  |      |           |   |      |   |           |      |  |   |           |  
|Interest expense                                                                                   |  |      |           |   |      |   |           |      |  |   |           |  
|Deposits                                                                                           |  |      | 2,125,879 |   |      |   | 1,761,300 |      |  |   | 1,813,628 |  
|Federal funds purchased and securities sold under agreements to repurchase                         |  |      | 8,328     |   |      |   | 24,130    |      |  |   | 17,002    |  
|Short-term debt                                                                                    |  |      | 5,291     |   |      |   | 17,449    |      |  |   | 46,734    |  
|Long-term debt                                                                                     |  |      | 293,500   |   |      |   | 161,584   |      |  |   | 218,194   |  
|                                                                                                   |  |      |           |   |      |   |           |      |  |   |           |  
|Total interest expense                                                                             |  |      | 2,432,998 |   |      |   | 1,964,463 |      |  |   | 2,095,558 |  
|                                                                                                   |  |      |           |   |      |   |           |      |  |   |           |  
|Net interest income                                                                                |  |      | 5,874,300 |   |      |   | 5,419,040 |      |  |   | 4,579,992 |  
|Provision for loan losses                                                                          |  |      | 325,032   |   |      |   | 378,401   |      |  |   | 651,005   |  
|                                                                                                   |  |      |           |   |      |   |           |      |  |   |           |  
|Net interest income after provision for loan losses                                                |  |      | 5,549,268 |   |      |   | 5,040,639 |      |  |   | 3,928,987 |  
|                                                                                                   |  |      |           |   |      |   |           |      |  |   |           |  
|Noninterest income                                                                                 |  |      |           |   |      |   |           |      |  |   |           |  
|Service charges on deposit accounts                                                                |  |      | 949,520   |   |      |   | 805,609   |      |  |   | 619,456   |  
|Gain and fees on the sale of loan servicing rights                                                 |  |      | 501,610   |   |      |   |          |      |  |   |          |  
|Net gain on sale of mortgage loans                                                                 |  |      |          |   |      |   | 411,289   |      |  |   | 182,735   |  
|Fees on mortgage loans delivered to correspondents                                                 |  |      | 298,590   |   |      |   | 74,618    |      |  |   | 112,855   |  
|Other service charges and fees                                                                     |  |      | 236,620   |   |      |   | 214,792   |      |  |   | 100,815   |  
|Other operating income                                                                             |  |      | 450,436   |   |      |   | 582,277   |      |  |   | 454,743   |  
|                                                                                                   |  |      |           |   |      |   |           |      |  |   |           |  
|Total noninterest income                                                                           |  |      | 2,436,776 |   |      |   | 2,088,585 |      |  |   | 1,470,604 |  
|                                                                                                   |  |      |           |   |      |   |           |      |  |   |           |  
|Noninterest expense                                                                                |  |      |           |   |      |   |           |      |  |   |           |  
|Salaries and employee benefits                                                                     |  |      | 2,614,627 |   |      |   | 2,329,385 |      |  |   | 1,896,237 |  
|Occupancy expense                                                                                  |  |      | 356,025   |   |      |   | 283,557   |      |  |   | 203,132   |  
|Equipment expense                                                                                  |  |      | 405,603   |   |      |   | 434,493   |      |  |   | 328,762   |  
|Data processing                                                                                    |  |      | 364,772   |   |      |   | 291,204   |      |  |   | 237,226   |  
|Lower of cost or market adjustment on loans transferred from available for sale to portfolio loans |  |      |          |   |      |   | 213,581   |      |  |   |          |  
|Foreclosed assets, net                                                                             |  |      |          |   |      |   |          |      |  |   | (3,395    | )
|Other expense                                                                                      |  |      | 1,417,321 |   |      |   | 1,557,507 |      |  |   | 941,727   |  
|                                                                                                   |  |      |           |   |      |   |           |      |  |   |           |  
|Total noninterest expense                                                                          |  |      | 5,158,348 |   |      |   | 5,109,727 |      |  |   | 3,603,689 |  
|                                                                                                   |  |      |           |   |      |   |           |      |  |   |           |  
|Net income before income taxes                                                                     |  |      | 2,827,696 |   |      |   | 2,019,497 |      |  |   | 1,795,902 |  
|Income tax expense                                                                                 |  |      | 998,724   |   |      |   | 758,112   |      |  |   | 640,026   |  
|Minority interest in subsidiary earnings                                                           |  |      |          |   |      |   |          |      |  |   | (108,568  | )
|                                                                                                   |  |      |           |   |      |   |           |      |  |   |           |  
|Net income                                                                                         |  |      | 1,828,972 |   |      |   | 1,261,385 |      |  |   | 1,047,308 |  
|Preferred stock dividends                                                                          |  |      | (119,277  | ) |      |   | (66,349   | )    |  |   |          |  
|                                                                                                   |  |      |           |   |      |   |           |      |  |   |           |  
|Net income available to common stockholders                                                        |  | $    | 1,709,695 |   |      | $ | 1,195,036 |      |  | $ | 1,047,308 |  
|                                                                                                   |  |      |           |   |      |   |           |      |  |   |           |  
|Basic earnings per share                                                                           |  | $    | 1.43      |   |      | $ | 1.04      |      |  | $ | 0.91      |  
|                                                                                                   |  |      |           |   |      |   |           |      |  |   |           |  
|Diluted earnings per share                                                                         |  | $    | 1.26      |   |      | $ | 0.93      |      |  | $ | 0.84      |  
|                                                                                                   |  |      |           |   |      |   |           |      |  |   |           |  
|Basic weighted average shares outstanding                                                          |  |      | 1,195,194 |   |      |   | 1,153,172 |      |  |   | 1,149,882 |  
|                                                                                                   |  |      |           |   |      |   |           |      |  |   |           |  
|Diluted weighted average shares outstanding                                                        |  |      | 1,454,434 |   |      |   | 1,355,034 |      |  |   | 1,247,360 |  
|                                                                                                   |  |      |           |   |      |   |           |      |  |   |           |  



See Notes to Consolidated
Financial Statements



4



---

Consolidated Statements of Stockholders Equity

For the years ended December 31, 2004, 2003 and 2002



|                                                                                                                  |  |                            |  |              |   |        |         |   |        |                  |           |                                     |  |   |           |   |  |   |           |  |   |         |   |  |   |           |  
|----------------------------------------------------------------------------------------------------------------- |  | -------------------------- |  | ------------ | - | ------ | ------- | - | ------ | ---------------- | --------- | ----------------------------------- |  | - | --------- | - |  | - | --------- |  | - | ------- | - |  | - | --------- | -
|                                                                                                                  |  | ConvertiblePreferred Stock |  | Common Stock |   |        | Surplus |   |        | RetainedEarnings |           | AccumulatedOtherComprehensiveIncome |  |   | Total     |  
|                                                                                                                  |  | Shares                     |  | Amount       |   | Shares |         |   | Amount |                  |           |                                     |  |  
|Balance, December 31, 2001                                                                                        |  |                           |  | $            |  |        | 956,033 |   |        | $                | 4,780,165 |                                     |  | $ | 2,915,103 |   |  | $ | 385,185   |  | $ | 18,847  |   |  | $ | 8,099,300 |  
|Comprehensive income                                                                                              |  |                            |  |              |   |        |         |   |        |                  |           |                                     |  |   |           |   |  |   |           |  |   |         |   |  |   |           |  
|Net income                                                                                                        |  |                           |  |              |  |        |        |   |        |                  |          |                                     |  |   |          |   |  |   | 1,047,308 |  |   |        |   |  |   | 1,047,308 |  
|Net change in unrealized gain (loss) on investment securities available for sale, net of income taxes of $(112)   |  |                           |  |              |  |        |        |   |        |                  |          |                                     |  |   |          |   |  |   |          |  |   | (218    | ) |  |   | (218      | )
|                                                                                                                  |  |                            |  |              |   |        |         |   |        |                  |           |                                     |  |   |           |   |  |   |           |  |   |         |   |  |   |           |  
|Total comprehensive income                                                                                        |  |                            |  |              |   |        |         |   |        |                  |           |                                     |  |   |           |   |  |   |           |  |   |         |   |  |   | 1,047,090 |  
|Change par value of common stock from $5 to $4                                                                    |  |                           |  |              |  |        |        |   |        |                  | (958,376  | )                                   |  |   | 958,376   |   |  |   |          |  |   |        |   |  |   |          |  
|Fractional shares purchased                                                                                       |  |                           |  |              |  |        | (426    | ) |        |                  | (1,704    | )                                   |  |   | (2,238    | ) |  |   |          |  |   |        |   |  |   | (3,942    | )
|Common stock reissued                                                                                             |  |                           |  |              |  |        | 426     |   |        |                  | 1,704     |                                     |  |   | 2,938     |   |  |   |          |  |   |        |   |  |   | 4,642     |  
|Stock options exercised                                                                                           |  |                           |  |              |  |        | 2,343   |   |        |                  | 11,715    |                                     |  |   | 5,581     |   |  |   |          |  |   |        |   |  |   | 17,296    |  
|                                                                                                                  |  |                            |  |              |   |        |         |   |        |                  |           |                                     |  |   |           |   |  |   |           |  |   |         |   |  |   |           |  
|Balance, December 31, 2002                                                                                        |  |                           |  |              |  |        | 958,376 |   |        |                  | 3,833,504 |                                     |  |   | 3,879,760 |   |  |   | 1,432,493 |  |   | 18,629  |   |  |   | 9,164,386 |  
|Comprehensive income                                                                                              |  |                            |  |              |   |        |         |   |        |                  |           |                                     |  |   |           |   |  |   |           |  |   |         |   |  |   |           |  
|Net income                                                                                                        |  |                           |  |              |  |        |        |   |        |                  |          |                                     |  |   |          |   |  |   | 1,261,385 |  |   |        |   |  |   | 1,261,385 |  
|Net change in unrealized gain (loss) on investment securities available for sale, net of income taxes of $(9,698) |  |                           |  |              |  |        |        |   |        |                  |          |                                     |  |   |          |   |  |   |          |  |   | (15,404 | ) |  |   | (15,404   | )
|                                                                                                                  |  |                            |  |              |   |        |         |   |        |                  |           |                                     |  |   |           |   |  |   |           |  |   |         |   |  |   |           |  
|Total comprehensive income                                                                                        |  |                            |  |              |   |        |         |   |        |                  |           |                                     |  |   |           |   |  |   |           |  |   |         |   |  |   | 1,245,981 |  



Continued



5



---

Consolidated Statements of Stockholders Equity, continued

For the years ended December 31, 2004, 2003 and 2002



|                                                                                                                  |  |                             |  |              |           |        |           |   |        |                   |           |         |                                       |   |            |   |       |   |           |   |  |   |         |   |  |   |            |  
|----------------------------------------------------------------------------------------------------------------- |  | --------------------------- |  | ------------ | --------- | ------ | --------- | - | ------ | ----------------- | --------- | ------- | ------------------------------------- | - | ---------- | - | ----- | - | --------- | - |  | - | ------- | - |  | - | ---------- | -
|                                                                                                                  |  | Convertible Preferred Stock |  | Common Stock |           |        |           |   |        | Retained Earnings |           |         | AccumulatedOther Comprehensive Income |   |            |   |      
|                                                                                                                  |  | Shares                      |  | Amount       |           | Shares |           |   | Amount |                   |           | Surplus |                                       |   |            |   | Total |  
|6 for 5 common stock exchange pursuant to plan of reorganization and share exchange                               |  |                            |  |              |          |        | 191,675   |   |        |                   | 3,879,760 |         |                                       |   | (3,879,760 | ) |       |   |          |   |  |   |        |   |  |   |           |  
|Common stock options exercised                                                                                    |  |                            |  |              |          |        | 20,928    |   |        |                   | 121,174   |         |                                       |   |           |   |       |   |          |   |  |   |        |   |  |   | 121,174    |  
|Fractional shares purchased                                                                                       |  |                            |  |              |          |        | (790      | ) |        |                   | (12,051   | )       |                                       |   |           |   |       |   |          |   |  |   |        |   |  |   | (12,051    | )
|Issuance of convertible preferred stock                                                                           |  | 189,356                     |  |              | 2,620,325 |        |          |   |        |                   |          |         |                                       |   |           |   |       |   |          |   |  |   |        |   |  |   | 2,620,325  |  
|Dividends declared on convertible preferred stock ($.35 per share)                                                |  |                            |  |              |          |        |          |   |        |                   |          |         |                                       |   |           |   |       |   | (66,349   | ) |  |   |        |   |  |   | (66,349    | )
|                                                                                                                  |  |                             |  |              |           |        |           |   |        |                   |           |         |                                       |   |            |   |       |   |           |   |  |   |         |   |  |   |            |  
|Balance, December 31, 2003                                                                                        |  | 189,356                     |  |              | 2,620,325 |        | 1,170,189 |   |        |                   | 7,822,387 |         |                                       |   |           |   |       |   | 2,627,529 |   |  |   | 3,225   |   |  |   | 13,073,466 |  
|Comprehensive income                                                                                              |  |                             |  |              |           |        |           |   |        |                   |           |         |                                       |   |            |   |       |   |           |   |  |   |         |   |  |   |            |  
|Net income                                                                                                        |  |                            |  |              |          |        |          |   |        |                   |          |         |                                       |   |           |   |       |   | 1,828,972 |   |  |   |        |   |  |   | 1,828,972  |  
|Net change in unrealized gain (loss) on investment securities available for sale, net of income taxes of $(9,795) |  |                            |  |              |          |        |          |   |        |                   |          |         |                                       |   |           |   |       |   |          |   |  |   | (15,614 | ) |  |   | (15,614    | )
|                                                                                                                  |  |                             |  |              |           |        |           |   |        |                   |           |         |                                       |   |            |   |       |   |           |   |  |   |         |   |  |   |            |  
|Total comprehensive income                                                                                        |  |                            |  |              |          |        |          |   |        |                   |          |         |                                       |   |           |   |       |   |          |   |  |   |        |   |  |   | 1,813,358  |  
|Common stock options exercised                                                                                    |  |                            |  |              |          |        | 40,819    |   |        |                   | 249,865   |         |                                       |   |           |   |       |   |          |   |  |   |        |   |  |   | 249,865    |  
|Tax benefit related to exercise of non-incentive stock options                                                    |  |                            |  |              |          |        |          |   |        |                   | 28,009    |         |                                       |   |           |   |       |   |          |   |  |   |        |   |  |   | 28,009     |  
|Dividends declared on convertible preferred stock ($.63 per share)                                                |  |                            |  |              |          |        |          |   |        |                   |          |         |                                       |   |           |   |       |   | (119,277  | ) |  |   |        |   |  |   | (119,277   | )
|                                                                                                                  |  |                             |  |              |           |        |           |   |        |                   |           |         |                                       |   |            |   |       |   |           |   |  |   |         |   |  |   |            |  
|Balance, December 31, 2004                                                                                        |  | 189,356                     |  | $            | 2,620,325 |        | 1,211,008 |   |        | $                 | 8,100,261 |         |                                       | $ |           |   |       | $ | 4,337,224 |   |  | $ | (12,389 | ) |  | $ | 15,045,421 |  
|                                                                                                                  |  |                             |  |              |           |        |           |   |        |                   |           |         |                                       |   |            |   |       |   |           |   |  |   |         |   |  |   |            |  



See Notes to Consolidated
Financial Statements



6



---

Consolidated Statements of Cash Flows

For the years ended December 31, 2004, 2003 and 2002



|                                                                                                      |  |      |             |   |      |   |             |      |  |   |             |  
|----------------------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                                                      |  | 2004 |             |   | 2003 |   |             | 2002 | 
|Cash flows from operating activities                                                                  |  |      |             |   |      |   |             |      |  |   |             |  
|Net income                                                                                            |  | $    | 1,828,972   |   |      | $ | 1,261,385   |      |  | $ | 1,047,308   |  
|Adjustments to reconcile net income to net cash provided by operations:                               |  |      |             |   |      |   |             |      |  |   |             |  
|Minority interest in subsidiary earnings                                                              |  |      |            |   |      |   |            |      |  |   | 108,568     |  
|Depreciation and amortization                                                                         |  |      | 400,136     |   |      |   | 369,476     |      |  |   | 333,865     |  
|Provision for loan losses                                                                             |  |      | 325,032     |   |      |   | 378,401     |      |  |   | 651,005     |  
|Lower of cost or market adjustment on loans transferred from available for sale to portfolio loans    |  |      |            |   |      |   | 213,581     |      |  |   |            |  
|(Gain) loss on sale of fixed assets                                                                   |  |      | 16,339      |   |      |   | (125        | )    |  |   |            |  
|Deferred income taxes                                                                                 |  |      | (100,641    | ) |      |   | (180,746    | )    |  |   | (134,727    | )
|Accretion of discount on securities, net of amortization of premiums                                  |  |      | (14,860     | ) |      |   | 21,578      |      |  |   | (4,551      | )
|Changes in assets and liabilities:                                                                    |  |      |             |   |      |   |             |      |  |   |             |  
|Accrued income                                                                                        |  |      | 2,243       |   |      |   | (48,662     | )    |  |   | (169,091    | )
|Loans held for sale                                                                                   |  |      |            |   |      |   | (14,272,620 | )    |  |   | (2,746,457  | )
|Other assets                                                                                          |  |      | (15,295     | ) |      |   | (82,264     | )    |  |   | 41,324      |  
|Accrued interest payable                                                                              |  |      | 31,910      |   |      |   | (7,797      | )    |  |   | (57,889     | )
|Other liabilities                                                                                     |  |      | (145,997    | ) |      |   | (393,883    | )    |  |   | 471,768     |  
|                                                                                                      |  |      |             |   |      |   |             |      |  |   |             |  
|Net cash provided (used) by operating activities                                                      |  |      | 2,327,839   |   |      |   | (12,741,676 | )    |  |   | (458,877    | )
|                                                                                                      |  |      |             |   |      |   |             |      |  |   |             |  
|                                                                                                      |  |      |            
|Cash flows from investing activities                                                                  |  |      |             |   |      |   |             |      |  |   |             |  
|Net decrease (increase) in interest-bearing deposits with banks                                       |  |      | (8,691,339  | ) |      |   | 6,028,686   |      |  |   | (5,924,892  | )
|Net decrease (increase) in federal funds sold                                                         |  |      | (301,000    | ) |      |   |            |      |  |   | 250,000     |  
|Purchases of investment securities                                                                    |  |      | (4,986,298  | ) |      |   | (6,987,095  | )    |  |   | (8,383,284  | )
|Maturities of investment securities                                                                   |  |      | 7,709,571   |   |      |   | 5,681,156   |      |  |   | 8,656,345   |  
|Purchases of restricted equity securities                                                             |  |      | (345,660    | ) |      |   | (165,000    | )    |  |   | (67,700     | )
|Net increase in loans                                                                                 |  |      | (16,008,578 | ) |      |   | (18,541,185 | )    |  |   | (11,137,466 | )
|Proceeds from the sale of property and equipment                                                      |  |      | 2,290       |   |      |   | 8,900       |      |  |   |            |  
|Purchases of property and equipment                                                                   |  |      | (369,419    | ) |      |   | (1,149,578  | )    |  |   | (1,025,031  | )
|                                                                                                      |  |      |             |   |      |   |             |      |  |   |             |  
|Net cash used in investing activities                                                                 |  |      | (22,990,433 | ) |      |   | (15,124,116 | )    |  |   | (17,632,028 | )
|                                                                                                      |  |      |             |   |      |   |             |      |  |   |             |  
|                                                                                                      |  |      |            
|Cash flows from financing activities                                                                  |  |      |             |   |      |   |             |      |  |   |             |  
|Net increase in deposits                                                                              |  |      | 15,676,090  |   |      |   | 24,379,003  |      |  |   | 17,336,669  |  
|Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase |  |      | 29,188      |   |      |   | 2,133,235   |      |  |   | (884,089    | )
|Net decrease in short-term debt                                                                       |  |      | (1,400,000  | ) |      |   | (100,000    | )    |  |   | (887,500    | )
|Net increase (decrease) in long-term debt                                                             |  |      | 6,052,872   |   |      |   | (692,548    | )    |  |   | 2,568,028   |  
|Dividends paid on preferred stock                                                                     |  |      | (119,360    | ) |      |   | (36,279     | )    |  |   |            |  
|Preferred stock issued, net                                                                           |  |      |            |   |      |   | 2,620,325   |      |  |   |            |  
|Fractional shares purchased                                                                           |  |      |            |   |      |   | (12,051     | )    |  |   | (3,942      | )
|Common stock reissued                                                                                 |  |      |            |   |      |   |            |      |  |   | 4,642       |  
|Stock options exercised                                                                               |  |      | 249,865     |   |      |   | 121,173     |      |  |   | 17,296      |  
|Tax benefit related to exercise of non-inventive stock options                                        |  |      | 28,009      |   |      |   |            |      |  |   |            |  
|                                                                                                      |  |      |             |   |      |   |             |      |  |   |             |  
|Net cash provided by financing activities                                                             |  |      | 20,516,664  |   |      |   | 28,412,858  |      |  |   | 18,151,104  |  
|                                                                                                      |  |      |             |   |      |   |             |      |  |   |             |  
|Net increase (decrease) in cash and cash equivalents                                                  |  |      | (145,930    | ) |      |   | 547,066     |      |  |   | 60,199      |  
|                                                                                                      |  |      |            
|Cash and cash equivalents, beginning                                                                  |  |      | 1,956,473   |   |      |   | 1,409,407   |      |  |   | 1,349,208   |  
|                                                                                                      |  |      |             |   |      |   |             |      |  |   |             |  
|Cash and cash equivalents, ending                                                                     |  | $    | 1,810,543   |   |      | $ | 1,956,473   |      |  | $ | 1,409,407   |  
|                                                                                                      |  |      |             |   |      |   |             |      |  |   |             |  



Continued



7



---

Consolidated Statements of Cash Flows

For the years ended December 31, 2004, 2003 and 2002



|                                                                                 |  |      |           |      |   |            |  |   |          
|-------------------------------------------------------------------------------- |  | ---- | --------- | ---- | - | ---------- |  | - | ---------
|                                                                                 |  | 2004 |           | 2003 |   | 2002      
|Supplemental disclosures of cash flow information                                |  |      |           |      |   |            |  |   |          
|Interest paid                                                                    |  | $    | 2,401,088 |      | $ | 1,972,260  |  | $ | 2,153,447
|                                                                                 |  |      |           |      |   |            |  |   |          
|Income taxes paid                                                                |  | $    | 1,052,752 |      | $ | 1,350,135  |  | $ | 507,663  
|                                                                                 |  |      |           |      |   |            |  |   |          
|Supplemental disclosure of non-cash transactions                                 |  |      |           |      |   |            |  |   |          
|Non-cash transactions related to acquisition of minority interest in subsidiary: |  |      |           |      |   |            |  |   |          
|Cancellation of loan and interest receivable                                     |  |      |          |      |   | 422,984    |  |   |         
|Cancellation of loans receivable from recourse obligations                       |  |      |          |      |   | 243,850    |  |   |         
|Addition to allowance for loans losses                                           |  |      |          |      |   | 57,852     |  |   |         
|                                                                                 |  |      |           |      |   |            |  |   |          
|Total transaction                                                                |  | $    |          |      | $ | 724,686    |  | $ |         
|                                                                                 |  |      |           |      |   |            |  |   |          
|Transfer of loans held for sale to loan portfolio                                |  | $    |          |      | $ | 18,746,533 |  | $ |         
|                                                                                 |  |      |           |      |   |            |  |   |          



See Notes to Consolidated
Financial Statements



8



---

Notes to Consolidated Financial Statements



Note 1. Organization and Summary of Significant Accounting Policies



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 shares for every five shares of
Surrey Bank & Trust common shares owned. The Company is subject to regulation by the Federal Reserve.



Surrey Bank & Trust (the Bank) was organized and incorporated under the laws of the State of North Carolina on July 15, 1996 and commenced operations on July 22, 1996. The Bank currently serves Surry
County, North Carolina and Patrick County, Virginia and surrounding areas through five banking offices. As a state chartered bank, which is not a member of the Federal Reserve, the Bank is subject to regulation by the State of North Carolina Banking
Commission and the Federal Deposit Insurance Corporation.



Surrey Investment
Services, Inc. (Subsidiary) was organized and incorporated under the laws of the State of North Carolina on February 10, 1998. The subsidiary provides insurance services through SB&T Insurance and investment advice and brokerage services through
U-VEST.



On July 31, 2000, Surrey Bank & Trust formed Friendly Finance,
LLC, a subsidiary operation specializing in the purchase of sales finance contracts from local automobile dealers. The Bank originally had a 60% majority interest in the company. On March 1, 2003 the Bank acquired the minority interest in Friendly
Finance, LLC in exchange for the satisfaction of other commitments of the holder of the minority interest.



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



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 which often require assumptions or estimates about highly uncertain matters. Changes in these judgments, assumptions or
estimates could cause reported results to differ materially. These critical policies and their application are periodically reviewed with the Audit Committee and our Board of Directors.



Principles of Consolidation



The consolidated financial statements include the accounts of the Company, the Bank, and 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.



Use of Estimates



The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those estimates.



9



---

Notes to Consolidated Financial Statements



Note 1. Organization and Summary of Significant Accounting Policies, continued



Use of Estimates, continued



Material estimates that are particularly susceptible to significant change relate to the determination of the
allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for loan and foreclosed real estate losses, management obtains
independent appraisals for significant properties.



Substantially all of the
Companys loan portfolio consists of loans in its market area. Accordingly, the ultimate collectibility of a substantial portion of the Companys loan portfolio and the recovery of a substantial portion of the carrying amount of foreclosed
real estate are susceptible to changes in local market conditions. The regional economy is diverse, but influenced to an extent by the manufacturing and agricultural segments.



While management uses available information to recognize loan and foreclosed real estate losses, future additions to the allowances may be
necessary based on changes in local economic conditions. In addition, regulatory agencies, as a part of their routine examination process, periodically review the Companys allowances for loan and foreclosed real estate losses. Such agencies
may require the Company to recognize additions to the allowances based on their judgments about information available to them at the time of their examinations. Because of these factors, it is reasonably possible that the allowances for loan and
foreclosed real estate losses may change materially in the near term.



Cash and Cash Equivalents



For the purpose of
presentation in the statement of cash flows, cash and cash equivalents are defined as those amounts included in the balance sheet caption cash and due from banks.



Interest-bearing Deposits with Banks



Interest-bearing deposits with banks mature within one year and are carried at cost.



Trading Securities



The Company does not hold securities for short-term resale and therefore does not maintain a trading securities portfolio.



Securities Held to Maturity



Bonds, notes, and debentures for which the Company has the positive intent and ability to
hold to maturity are reported at cost, adjusted for premiums and discounts that are recognized in interest income using the interest method over the period to maturity or to call dates. All securities held by the Company at December 31, 2004 and
2003 were classified as available-for-sale.



Securities Available for
Sale



Available for sale securities are reported at fair value and
consist of bonds, notes, debentures, and certain equity securities not classified as trading securities or as held to maturity securities.



Unrealized holding gains and losses, net of tax, on available for sale securities are reported as a net amount in a separate component of stockholders equity.
Realized gains and losses on the sale of available for sale securities are determined using the specific-identification method. Premiums and discounts are recognized in interest income using the interest method over the period to maturity or to call
dates.



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



10



---

Notes to Consolidated Financial Statements



Note 1. Organization and Summary of Significant Accounting Policies, continued



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.



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 costs on originated loans and unamortized premiums or discounts on purchased loans.



Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan. Discounts and premiums on any purchased residential real estate loans are
amortized to income using the interest method over the remaining period to contractual maturity, adjusted for anticipated prepayments. Discounts and premiums on any purchased consumer loans are recognized over the expected lives of the loans using
methods that approximate the interest method.



Interest is accrued and credited
to income based on the principal amount outstanding. The accrual of interest on impaired loans is discontinued when, in managements opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued,
all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. When facts and circumstances indicate the borrower has regained the ability to meet the required payments, the loan is
returned to accrual status. Past due loans are determined on the basis of contractual terms.



Allowance for Loan Losses



The
allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance
is confirmed. Subsequent recoveries, if any, are credited to the allowance.



The allowance for loan losses is evaluated on a regular basis by management and is based upon managements periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the borrowers ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.



The
allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as either doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is
established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss
experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect managements estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision
inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.



11



---

Notes to Consolidated Financial Statements



Note 1. Organization and Summary of Significant Accounting Policies, continued



Allowance for Loan Losses, continued



A loan is considered impaired when, based on current information and events, it is probable that the Company will be
unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment
delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrowers prior payment record,
and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the
loans effective interest rate, the loans obtainable market price, or the fair value of the collateral if the loan is collateral dependent.



Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and
residential loans for impairment disclosures.



Servicing



Servicing assets are recognized as separate assets when rights are
acquired through purchase or through sale of financial assets. Generally, purchased servicing rights are capitalized at the cost to acquire the rights. For sales of mortgage loans, a portion of the cost of originating the loan is allocated to the
servicing right based on relative fair value. Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, is based on a valuation model that calculates the present value of estimated future net
servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, the custodial earnings rate, an inflation rate, ancillary
income, prepayment speeds and default rates and losses. Capitalized servicing rights are reported in other assets and are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the
underlying financial assets.



Servicing assets are evaluated for impairment
based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights into tranches based on predominant risk characteristics, such as interest rate, loan type and investor type. Impairment is less
than the capitalized amount for the tranche, a reduction of the allowance may be recorded as an increase to income.



Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal; or a fixed amount per
loan and are recorded as income when earned. The amortization of mortgage servicing rights is netted against loan servicing fee income.



During the year ended December 31, 2004, the Company sold its mortgage servicing rights to another bank. The gain on that sale is reflected in the accompanying statements
of income. Accordingly, the Company has no servicing rights at December 31, 2004. Due to their immateriality and complex nature the Company did not capitalize its servicing assets in existence on December 31, 2003.



Property and Equipment



Land is carried at cost. Premises, furniture and equipment, and leasehold improvements are
carried at cost, less accumulated depreciation and amortization computed principally by the straight-line method over the following estimated useful lives:



|                           |  |      
|-------------------------- |  | -----
|                           |  | Years
|Buildings and improvements |  | 3-40 
|Furniture and equipment    |  | 3-25 



12



---

Notes to Consolidated Financial Statements



Note 1. Organization and Summary of Significant Accounting Policies, continued



Foreclosed Properties



Assets acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value less anticipated cost to
sell at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management, and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses
from operations and changes in the valuation allowance are included in foreclosed asset expense. The historical average holding period for such properties is less than six months.



Goodwill



Goodwill consist of premiums paid on acquisitions of insurance agencies. Goodwill is evaluated for impairment on an annual basis. Any impairment is charged against income
in the period of impairment.



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 (issued in October 1995), but complies with the disclosure requirements set forth in the Statement, which includes disclosing pro forma net income as if the fair value based method of accounting had been applied.



Transfers of Financial Assets



Transfers of financial assets are accounted for as sales, when control over the assets has
been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to
pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.



Income Taxes



Provision for income taxes is based on amounts reported in the statements of income (after exclusion of non-taxable income such as interest
on state and municipal securities) and consists of taxes currently due plus deferred taxes on temporary differences in the recognition of income and expense for tax and financial statement purposes. Deferred tax assets and liabilities are included
in the financial statements at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes.



Deferred
income tax liability relating to unrealized appreciation (or the deferred tax asset in the case of unrealized depreciation) on investment securities available for sale is recorded in other liabilities (assets). Such unrealized appreciation or
depreciation is recorded as an adjustment to equity in the financial statements and not included in income determination until realized. Accordingly, the resulting deferred income tax liability or asset is also recorded as an adjustment to equity.



Basic Earnings per Share



Basic earnings per share is computed by dividing income available to common shareholders by
the weighted average number of common shares outstanding during the period, after giving retroactive effect to stock splits and dividends.



Diluted Earnings per Share



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.



13



---

Notes to Consolidated Financial Statements



Note 1. Organization and Summary of Significant Accounting Policies, continued



Comprehensive Income



Annual comprehensive income reflects the change in the Companys equity during the year arising from transactions and events other than
investments by and distributions to shareholders. It consists of net income plus certain other changes in assets and liabilities that are reported as separate components of shareholders equity rather than as income or expense.



Advertising Cost



The Company incurred marketing and advertising cost of $108,236, $80,604 and $62,261 for the years ended December 31, 2004, 2003 and 2002,
respectively. The amounts are expensed as incurred and included in the statements of income under other expense.



Off-Balance Sheet Credit Related Financial Instruments



In the ordinary course of business, the Company has entered into commitments to extend credit, including commitments under line of credit arrangements, commercial letters
of credit, and standby letters of credit. Such financial instruments are recorded when they are funded.



Derivative Financial Instruments and Change in Accounting Principle



On January 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging
Activities. This Statement requires that all derivatives be recognized as assets or liabilities in the balance sheet and measured at fair value.



Interest Rate Swap Agreements



For asset/liability management purposes, the Company may use interest rate swap agreements to hedge various exposures or to modify interest rate characteristics of
various balance sheet accounts. Such derivatives are used as part of the asset/liability management process and are linked to specific assets or liabilities, and have high correlation between the contract and the underlying item being hedged, both
at inception and throughout the hedge period.



The Company may use interest
rate swap agreements to convert a portion of its variable-rate debt to fixed rate (cash flow hedge), and to convert a portion of its fixed-rate loans to a variable rate (fair value hedge). Interest rate swaps are contracts in which a series of
interest rate flows are exchanged over a prescribed period. The notional amount on which the interest payments are based is not exchanged.



Under SFAS No. 133, the gain or loss on all derivatives designated and qualifying as a fair value hedging instrument, as well as the offsetting gain or loss on the hedged
item attributable to the risk being hedged, is recognized currently in earnings in the same accounting period. The effective portion of the gain or loss on a derivative designated and qualifying as a cash flow hedging instrument is initially
reported as a component of other comprehensive income and subsequently reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of the gain or loss on the derivative
instrument, if any, is recognized currently in earnings.



14



---

Notes to Consolidated Financial Statements



Note 1. Organization and Summary of Significant Accounting Policies, continued



Interest Rate Swap Agreements, continued



Interest rate derivative financial instruments receive hedge accounting treatment only if they are designated as a
hedge and are expected to be, and are, effective in substantially reducing interest rate risk arising from the assets and liabilities identified as exposing the Company to risk. Those derivative financial instruments that do not meet the hedging
criteria discussed below would be classified as trading activities and would be recorded at fair value with changes in fair value recorded in income. Derivative hedge contracts must meet specific effectiveness tests (i.e., over time the change in
their fair values due to the designated hedge risk must be within 80 to 125 percent of the opposite change in the fair values of the hedged assets or liabilities). Changes in fair value of the derivative financial instruments must be effective at
offsetting changes in the fair value of the hedged items due to the designated hedge risk during the term of the hedge. Further, if the underlying financial instrument differs from the hedged asset or liability, there must be a clear economic
relationship between the prices of the two financial instruments. If periodic assessment indicated derivatives no longer provide an effective hedge, the derivatives contracts would be closed out and settled or classified as a trading activity.



Beginning January 1, 2001, in accordance with SFAS No. 133, hedges of
variable-rate debt are accounted for as cash flow hedges, with changes in fair value recorded in derivative assets or liabilities and other comprehensive income. The net settlement (upon close out or termination) that offsets changes in the value of
the hedged debt is deferred and amortized into net interest income over the life of the hedged debt. Hedges of fixed-rate loans are accounted for as fair value hedges, with changes in fair value recorded in derivative assets or liabilities and loan
interest income. The net settlement (upon close out or termination) that offsets changes in the value of the loans adjusts the basis of the loans and is deferred and amortized to loan interest income over the life of the loans. The portion, if any,
of the net settlement amount that did not offset changes in the value of the hedged asset or liability is recognized immediately in non-interest income.



Cash flow resulting from the derivative financial instruments that are accounted for as hedges of assets and liabilities are classified in the cash flow statement in the
same category as the cash flows of the items being hedged.



The cumulative
effect of adopting SFAS No. 133 for interest rate swap agreements as of January 1, 2001 did not have a material effect on the Companys financial statements.



Rate Lock Commitments



The Company enters into commitments to originate loans whereby the interest rate on the loan is determined prior to funding (rate lock commitments). Rate lock commitments
on mortgage loans that are intended to be sold are considered to be derivatives. Accordingly, such commitments, along with any related fees received from potential borrowers, are recorded at fair value in derivative assets or liabilities, with
changes in fair value recorded in the net gain on sale of mortgage loans. Fair value is based on fees currently charged to enter into similar agreements, and for fixed-rate commitments also considers the difference between current levels of interest
rates and the committed rates. Prior to July 1, 2002, such commitments were recorded to the extent of fees received. Fees received were subsequently included in the net gain on sale of mortgage loans.



At December 31, 2004 and 2003 the Company had no originated mortgage loans available for
sale. Therefore, no rate lock commitments existed at those dates. Mortgage loans sold in the secondary market are now originated through correspondents and are not funded by the Company.



15



---

Notes to Consolidated Financial Statements



Note 1. Organization and Summary of Significant Accounting Policies, continued



Fair Value of Financial Instruments



Statement of Financial Accounting Standards No. 107, Disclosures about Fair Value of Financial Instruments, requires disclosure of fair
value information about financial instruments, whether or not recognized in the balance sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many
cases, could not be realized in immediate settlement of the instruments. Statement No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.



The following
methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:



Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate their fair values.



Interest-bearing deposits with banks: Fair values for time deposits are estimated
using a discounted cash flow analysis that applies interest rates currently being offered on certificates to a schedule of aggregated contractual maturities on such time deposits.



Available-for-sale and held-to-maturity securities: Fair values for securities, excluding restricted equity securities, 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. The carrying values of restricted equity securities approximate fair values.



Loans receivable: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying amounts. The fair values for other loans are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality. Loan fair value estimates include judgments regarding future expected loss experience and risk characteristics. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying
collateral values, where applicable. The carrying amount of accrued interest receivable approximates its fair value.



Deposit liabilities: The fair values disclosed for demand and savings deposits are, by definition, equal to the amount payable on demand at the reporting date. The
fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated contractual maturities on such time deposits. The carrying
amount of accrued interest payable approximates fair value.



Federal funds
purchased, securities sold under agreements to repurchase and short-term debt: The carrying amounts of federal funds purchased, securities sold under agreements to repurchase and short-term debt approximate their fair values.



Long-term debt:The fair value of long-term debt is estimated using a discounted cash
flow calculation that applies interest rates currently available on similar instruments.



Other liabilities: For fixed-rate loan commitments, fair value considers the difference between current levels of interest rates and the committed rates. The carrying amounts of other liabilities approximates
fair value.



Reclassification



Certain reclassifications have been made to the prior years financial statements to
place them on a comparable basis with the current year. Net income and stockholders equity previously reported were not affected by these reclassifications.



16



---

Notes to Consolidated Financial Statements



Note 1. Organization and Summary of Significant Accounting Policies, continued



Recent Accounting Pronouncements



In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004) (SFAS 123(R)), Share-Based
Payments. SFAS 123(R) requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments, such as stock options granted to employees. The Company will most likely apply SFAS 123(R) on a modified
prospective method. Under this method, the Company is required to record compensation expense (as previous awards continue to vest) for the unvested portion of previously granted stock option awards that remain outstanding at the date of adoption.
In addition, the Company may elect to adopt SFAS 123(R) by restating previously issued financial statements, basing the amounts on the expense previously calculated and reported in the pro forma disclosures that had been required by SFAS 123,
Accounting for Stock-Based Compensation. As a small business issuer, SFAS 123(R) is effective for the Company for the first reporting period beginning after December 15, 2005.



Note 2. Restrictions on Cash



To comply with banking regulations, the Company is required to maintain certain average cash reserve balances. The daily average cash reserve requirement was
approximately $490,000 and $545,000 for the periods including December 31, 2004 and 2003, respectively.



Note 3. Securities



Debt and equity
securities have been classified in the balance sheets according to managements intent. The carrying amounts of securities and their approximate fair values at December 31, 2004 and 2003 follow:



|                                  |  |                |           |                  |   |                   |  |            |        |  |   |          
|--------------------------------- |  | -------------- | --------- | ---------------- | - | ----------------- |  | ---------- | ------ |  | - | ---------
|2004                              |  | Amortized Cost |           | Unrealized Gains |   | Unrealized Losses |  | Fair Value
|Available for sale                |  |                |           |                  |   |                   |  |            |        |  |   |          
|U.S. Government agency securities |  | $              | 2,497,680 |                  | $ |                  |  | $          | 21,830 |  | $ | 2,475,850
|Mortgage-backed securities        |  |                | 214,632   |                  |   | 1,669             |  |            |       |  |   | 216,301  
|State and municipal               |  |                |          |                  |   |                  |  |            |       |  |   |         
|                                  |  |                |           |                  |   |                   |  |            |        |  |   |          
|                                  |  | $              | 2,712,312 |                  | $ | 1,669             |  | $          | 21,830 |  | $ | 2,692,151
|                                  |  |                |           |                  |   |                   |  |            |        |  |   |          
|                                  |  |                |           |                 
|2003                              |  | Amortized Cost |           | Unrealized Gains |   | Unrealized Losses |  | Fair Value
|Available for sale                |  |                |           |                  |   |                   |  |            |        |  |   |          
|U.S. Government agency securities |  | $              | 4,998,923 |                  | $ | 1,839             |  | $          | 1,812  |  | $ | 4,998,950
|Mortgage-backed securities        |  |                | 321,674   |                  |   | 4,961             |  |            |       |  |   | 326,635  
|State and municipal               |  |                | 100,127   |                  |   | 261               |  |            |       |  |   | 100,388  
|                                  |  |                |           |                  |   |                   |  |            |        |  |   |          
|                                  |  | $              | 5,420,724 |                  | $ | 7,061             |  | $          | 1,812  |  | $ | 5,425,973
|                                  |  |                |           |                  |   |                   |  |            |        |  |   |          



Restricted equity securities were
$790,660 and $445,000 at December 31, 2004 and 2003. Restricted equity securities consist of investments in stock of the Federal Home Loan Bank of Atlanta (FHLB) and Community Bankers Bank. These investments are carried at cost. The FHLB
requires financial institutions to make equity investments in the FHLB in order to borrow money. The Company is required to hold that stock so long as it borrows from the FHLB.



At December 31, 2004 and 2003 substantially all investment securities were pledged as collateral on public deposits and for other purposes
as required or permitted by law.



17



---

Notes to Consolidated Financial Statements



Note 3. Securities, continued



Maturities of mortgage-backed bonds are stated based on contractual maturities. Actual maturities of these bonds may
vary as the underlying mortgages are prepaid. The scheduled maturities of securities (all available for sale) at December 31, 2004 were as follows:



|                                       |  |               |           |            |   |          
|-------------------------------------- |  | ------------- | --------- | ---------- | - | ---------
|                                       |  | AmortizedCost |           | Fair Value
|Due in one year or less                |  | $             | 997,936   |            | $ | 997,400  
|Due after one year through five years  |  |               | 1,499,744 |            |   | 1,478,450
|Due after five years through ten years |  |               |          |            |   |         
|Due after ten years                    |  |               | 214,632   |            |   | 216,301  
|                                       |  |               |           |            |   |          
|                                       |  | $             | 2,712,312 |            | $ | 2,692,151
|                                       |  |               |           |            |   |          



For the years ended December 31, 2004,
2003 and 2002, the Company had no gain or loss from the sale of investment securities. All were held to their scheduled maturity dates.



The following table shows investments gross unrealized losses and fair value, aggregated by investment category and length of time that the individual securities
have been in a continuous unrealized loss position, at December 31, 2004. These unrealized losses on investment securities are a result of volatility in interest rates during 2004 and relate to five agency securities.



|                         |  |                     |           |                   |   |           |  |                  |         |           |   |                  |  |       |  |   |           |  |   |       
|------------------------ |  | ------------------- | --------- | ----------------- | - | --------- |  | ---------------- | ------- | --------- | - | ---------------- |  | ----- |  | - | --------- |  | - | ------
|                         |  | Less Than 12 Months |           | 12 Months or More |   | Total    
|                         |  | FairValue           |           | UnrealizedLosses  |   | FairValue |  | UnrealizedLosses |         | FairValue |   | UnrealizedLosses
|U.S. government agencies |  | $                   | 1,982,700 |                   | $ | 15,345    |  | $                | 493,150 |           | $ |                  |  | 6,485 |  | $ | 2,475,850 |  | $ | 21,830



Management considers the nature of the
investment, the underlying causes of the decline in market value, the severity and duration of the decline in market value and other evidence, on a security by security basis, in determining if the decline in market value is other than temporary.
Management believes all unrealized losses presented in the table above to be temporary in nature.



18



---

Notes to Consolidated Financial Statements



Note 4. Loans Receivable



The major components of loans in the balance sheets at December 31, 2004 and 2003 are as follows:



|                                             |  |      |             |   |      |   |             |  
|-------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                             |  | 2004 |             |   | 2003 |  
|Commercial                                   |  | $    | 82,621,131  |   |      | $ | 66,675,083  |  
|Real estate:                                 |  |      |             |   |      |   |             |  
|Construction and land development            |  |      | 3,093,423   |   |      |   | 5,799,087   |  
|Residential, 1-4 families                    |  |      | 40,005,007  |   |      |   | 38,499,158  |  
|Farmland                                     |  |      | 341,540     |   |      |   | 127,277     |  
|Nonfarm, nonresidential                      |  |      | 830,457     |   |      |   | 879,280     |  
|Agricultural                                 |  |      | 183,777     |   |      |   | 107,685     |  
|Consumer, net of discounts of $ 25,035       |  |      | 8,034,675   |   |      |   | 7,595,515   |  
|Other                                        |  |      | 223,200     |   |      |   | 78,178      |  
|                                             |  |      |             |   |      |   |             |  
|                                             |  |      | 135,333,210 |   |      |   | 119,761,263 |  
|Unearned loan origination fees, net of costs |  |      | 7,086       |   |      |   | (288,824    | )
|                                             |  |      |             |   |      |   |             |  
|                                             |  |      | 135,340,296 |   |      |   | 119,472,439 |  
|Allowance for loan losses                    |  |      | (2,294,131  | ) |      |   | (2,109,820  | )
|                                             |  |      |             |   |      |   |             |  
|                                             |  | $    | 133,046,165 |   |      | $ | 117,362,619 |  
|                                             |  |      |             |   |      |   |             |  



Note 5. Allowance for Loan Losses



Changes in the allowance for loan losses are as follows:



|                                  |  |      |           |   |      |   |           |      |  |   |           |  
|--------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                  |  | 2004 |           |   | 2003 |   |           | 2002 | 
|Balance, beginning                |  | $    | 2,109,820 |   |      | $ | 1,831,167 |      |  | $ | 1,251,496 |  
|                                  |  |      |          
|Provision charged to expense      |  |      | 325,032   |   |      |   | 378,401   |      |  |   | 651,005   |  
|Recoveries of amounts charged off |  |      | 19,426    |   |      |   | 42,487    |      |  |   | 8,589     |  
|Amounts charged off               |  |      | (160,147  | ) |      |   | (142,235  | )    |  |   | (79,923   | )
|                                  |  |      |           |   |      |   |           |      |  |   |           |  
|Balance, ending                   |  | $    | 2,294,131 |   |      | $ | 2,109,820 |      |  | $ | 1,831,167 |  
|                                  |  |      |           |   |      |   |           |      |  |   |           |  



The following is a summary of
information pertaining to impaired loans at December 31:



|                                              |  |      |           |      |   |        
|--------------------------------------------- |  | ---- | --------- | ---- | - | -------
|                                              |  | 2004 |           | 2003
|Impaired loans without a valuation allowance  |  | $    | 405,900   |      | $ | 45,600 
|Impaired loans with a valuation allowance     |  |      | 853,600   |      |   | 190,900
|                                              |  |      |           |      |   |        
|Total impaired loans                          |  | $    | 1,259,500 |      | $ | 236,500
|                                              |  |      |           |      |   |        
|Valuation allowance related to impaired loans |  | $    | 239,300   |      | $ | 135,100
|                                              |  |      |           |      |   |        



Nonaccrual loans were $1,259,500 and
$236,500 at December 31, 2004 and December 31, 2003, respectively and are included in the table above. There were no other loans past due 90 days or more at December 31, 2004 or December 31, 2003.



19



---

Notes to Consolidated Financial Statements



Note 5. Allowance for Loan Losses, continued



The average annual recorded investment in impaired loans and interest income recognized on impaired loans for the
years ended December 31, 2004, 2003, and 2002 (all approximate) are summarized below:



|                                                             |  |      |         |      |   |        |  |   |        
|------------------------------------------------------------ |  | ---- | ------- | ---- | - | ------ |  | - | -------
|                                                             |  | 2004 |         | 2003 |   | 2002  
|Average investment in impaired loans                         |  | $    | 558,000 |      | $ | 95,100 |  | $ | 308,300
|                                                             |  |      |         |      |   |        |  |   |        
|Interest income recognized on impaired loans                 |  | $    | 31,600  |      | $ | 25,000 |  | $ | 31,100 
|                                                             |  |      |         |      |   |        |  |   |        
|Interest income recognized on a cash basis on impaired loans |  | $    | 16,800  |      | $ | 17,000 |  | $ | 27,800 
|                                                             |  |      |         |      |   |        |  |   |        



No additional funds are committed to
be advanced in connection with impaired loans.



Note 6. Loan Servicing



Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. On April 16, 2004, the Company sold its mortgage loan servicing rights to another bank. Therefore, there were no mortgage loans serviced for others at December 31, 2004. The unpaid principal balance of mortgage loans
serviced for others was $44,982,897 at December 31, 2003, and $23,180,689 at December 31, 2002.



Note 7. Property and Equipment



Components of property and equipment and total accumulated depreciation at December 31, 2004 and 2003 are as follows:



|                              |  |      |            |   |      |   |            |  
|----------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                              |  | 2004 |            |   | 2003 |  
|Land and improvements         |  | $    | 1,190,139  |   |      | $ | 950,732    |  
|Buildings and improvements    |  |      | 2,707,326  |   |      |   | 2,704,182  |  
|Furniture and equipment       |  |      | 1,857,735  |   |      |   | 2,091,782  |  
|                              |  |      |            |   |      |   |            |  
|                              |  |      | 5,755,200  |   |      |   | 5,746,696  |  
|Less accumulated depreciation |  |      | (1,522,776 | ) |      |   | (1,464,926 | )
|                              |  |      |            |   |      |   |            |  
|                              |  | $    | 4,232,424  |   |      | $ | 4,281,770  |  
|                              |  |      |            |   |      |   |            |  



At December 31, 2004, Company premises
with a carrying value of $118,079 were pledged as collateral for a mortgage loan.



Depreciation expense amounted to $400,136, $367,011 and $312,501 for the years ended December 31, 2004, 2003 and 2002, respectively.



20



---

Notes to Consolidated Financial Statements



Note 7. Property and Equipment, continued



The Companys West Pine Street branch, Stuart branch (land only) and Pilot Mountain branch are leased under
operating leases at a monthly rental of $1,456, $1,750, and $1,428, respectively. The West Pine Street lease is for a five-year term, which expires March 31, 2005. The Company has the option to renew the lease for four additional five-year terms and
has committed to extend the lease to March 31, 2010. This commitment is included in the future minimum rental commitments detailed below. The Stuart, Virginia branch land lease is for a term of one year, which expires in 2004. The Company has the
option to renew the lease for three additional one-year terms. The Pilot Mountain lease is for a term of six months, which expiries in 2005. Rental expense was $59,057, $43,379 and $37,800 for 2004, 2003 and 2002, respectively.



Pursuant to the terms of non-cancelable lease agreements in effect at December 31, 2004,
pertaining to banking premises and equipment, future minimum rent commitments under various operating leases are as follows:



|           |  |   |        
|---------- |  | - | -------
|2005       |  | $ | 47,412 
|2006       |  |   | 23,625 
|2007       |  |   | 23,625 
|2008       |  |   | 23,625 
|2009       |  |   | 23,625 
|Thereafter |  |   | 5,906  
|           |  |   |        
|           |  | $ | 147,818
|           |  |   |        



Note 8. Deposits



The aggregate amount of time deposits in denominations of $100,000 or more at December 31,
2004 and 2003 was $21,299,381 and $19,798,705, respectively. At December 31, 2004, the scheduled maturities of time deposits are as follows:



|           |  |   |           
|---------- |  | - | ----------
|2005       |  | $ | 53,536,527
|2006       |  |   | 3,006,536 
|2007       |  |   | 2,129,698 
|2008       |  |   | 2,236,745 
|Thereafter |  |   | 7,056,731 
|           |  |   |           
|           |  | $ | 67,966,237
|           |  |   |           



Note 9. Short-Term Debt



Short-term debt consists of federal funds purchased and securities sold
under agreements to repurchase, which generally mature within one to four days from the transaction date, and other short-term borrowings. Additional information at December 31, 2004 and 2003 and for the periods then ended is summarized below:



|                                                     |  |      |           |   |      |   |           |      |  |   |           |  
|---------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                     |  | 2004 |           |   | 2003 |   |           | 2002 | 
|Outstanding balance at December 31                   |  | $    | 3,447,823 |   |      | $ | 4,818,635 |      |  | $ | 2,785,400 |  
|                                                     |  |      |           |   |      |   |           |      |  |   |           |  
|Year-end weighted average rate                       |  |      | 2.48      | % |      |   | 0.74      | %    |  |   | 0.90      | %
|                                                     |  |      |           |   |      |   |           |      |  |   |           |  
|Daily average outstanding during the year            |  | $    | 1,180,551 |   |      | $ | 4,488,100 |      |  | $ | 3,710,414 |  
|                                                     |  |      |           |   |      |   |           |      |  |   |           |  
|Average rate for the period                          |  |      | 0.71      | % |      |   | 0.92      | %    |  |   | 1.72      | %
|                                                     |  |      |           |   |      |   |           |      |  |   |           |  
|Maximum outstanding at any month-end during the year |  | $    | 5,542,668 |   |      | $ | 7,259,156 |      |  | $ | 4,044,998 |  
|                                                     |  |      |           |   |      |   |           |      |  |   |           |  



21



---

Notes to Consolidated Financial Statements



Note 9. Short-Term Debt, continued



Lines of Credit



The Company has established various credit facilities to provide additional liquidity if and as needed. These include unsecured lines of
credit with correspondent banks totaling $13,700,000 and a secured line of credit with the Federal Home Loan Bank of Atlanta of approximately $20,460,000. At December 31, 2004 and 2003 there were outstanding balances of $14,250,000 and $8,050,000,
respectively, under credit arrangements with correspondent banks and the Federal Home Loan Bank of Atlanta.



Note 10. Long-Term Debt



The
Companys long-term debt includes instruments bearing fixed rates ranging from 1.80% to 8.0% and a variable rate instrument tied to the three month LIBOR rate. The weighted average rate of all long-term debt at December 31, 2004 was 3.61%.
Collateral consist of real estate, substantially all 1-4 family first lien residential real estate loans and certain investment securities. The contractual maturities of long-term debt are as follows:



|           |  |   |           
|---------- |  | - | ----------
|2005       |  | $ | 1,504,427 
|2006       |  |   | 2,004,795 
|2007       |  |   | 505,193   
|2008       |  |   | 2,005,624 
|2009       |  |   | 3,006,090 
|thereafter |  |   | 2,272,823 
|           |  |   |           
|           |  | $ | 11,298,952
|           |  |   |           



Note 11. Financial Instruments



Fair Values



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



|                                                            |  |                   |         |                   |   |                |  |            |         |  |   |        
|----------------------------------------------------------- |  | ----------------- | ------- | ----------------- | - | -------------- |  | ---------- | ------- |  | - | -------
|                                                            |  | December 31, 2004 |         | December 31, 2003
|                                                            |  | CarryingAmount    |         | Fair Value        |   | CarryingAmount |  | Fair Value
|Financial assets                                            |  |                   |         |                   |   |                |  |            |         |  |   |        
|Cash and cash equivalents                                   |  | $                 | 1,811   |                   | $ | 1,811          |  | $          | 1,956   |  | $ | 1,956  
|Federal funds sold and interest-bearing deposits with banks |  |                   | 13,060  |                   |   | 13,060         |  |            | 4,068   |  |   | 4,068  
|Securities, available for sale                              |  |                   | 2,692   |                   |   | 2,692          |  |            | 5,426   |  |   | 5,426  
|Restricted equity securities                                |  |                   | 791     |                   |   | 791            |  |            | 445     |  |   | 445    
|Loans, net of allowance for loan losses                     |  |                   | 133,046 |                   |   | 131,356        |  |            | 117,363 |  |   | 120,976
|                                                            |  |                   |         |                  
|Financial liabilities                                       |  |                   |         |                   |   |                |  |            |         |  |   |        
|Deposits                                                    |  |                   | 126,954 |                   |   | 126,692        |  |            | 111,278 |  |   | 111,782
|Short-term debt                                             |  |                   | 3,448   |                   |   | 3,444          |  |            | 4,819   |  |   | 4,827  
|Long-term debt                                              |  |                   | 11,299  |                   |   | 11,114         |  |            | 5,246   |  |   | 5,281  



Derivative Financial Instruments



In order to better manage interest rate risk, the Company entered
into a forward contract with Compass Bank on November 6, 2003. The face amount of the contract was $8,000,000 for a 69 day term. The company terminated the contract on December 3, 2003 for a loss of $52,500 which was classified in other expenses.



22



---

Notes to Consolidated Financial Statements



Note 12. Stockholders Equity



On May 22, 2002, the stockholders of Surrey Bank & Trust approved an amendment to the Articles of Incorporation changing the par value of the Companys common
stock from $5.00 per share to $4.00 per share. The effect of the change is reflected in the consolidated statements of changes in stockholders equity for the year ended December 31, 2002.



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



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



Note 13. Earnings Per Share



The following table details the computation of basic and diluted earnings per share for each year ended December 31.



|                                                     |  |      |           |   |      |   |           |      |  |   |          
|---------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | ---------
|                                                     |  | 2004 |           |   | 2003 |   |           | 2002
|Net income                                           |  | $    | 1,828,972 |   |      | $ | 1,261,385 |      |  | $ | 1,047,308
|Preferred stock dividends                            |  |      | (119,277  | ) |      |   | (66,349   | )    |  |   |         
|                                                     |  |      |           |   |      |   |           |      |  |   |          
|Net income (income available to common shareholders) |  | $    | 1,709,695 |   |      | $ | 1,195,036 |      |  | $ | 1,047,308
|                                                     |  |      |           |   |      |   |           |      |  |   |          
|Weighted average common shares outstanding           |  |      | 1,195,194 |   |      |   | 1,153,172 |      |  |   | 1,149,882
|Effect of dilutive securities:                       |  |      |           |   |      |   |           |      |  |   |          
|Options                                              |  |      | 94,595    |   |      |   | 110,292   |      |  |   | 97,478   
|Convertible preferred stock                          |  |      | 164,645   |   |      |   | 91,570    |      |  |   |         
|                                                     |  |      |           |   |      |   |           |      |  |   |          
|Weighted average common shares outstanding, diluted  |  |      | 1,454,434 |   |      |   | 1,355,034 |      |  |   | 1,247,360
|                                                     |  |      |           |   |      |   |           |      |  |   |          
|Basic earnings per share                             |  | $    | 1.43      |   |      | $ | 1.04      |      |  | $ | .91      
|                                                     |  |      |           |   |      |   |           |      |  |   |          
|Diluted earnings per share                           |  | $    | 1.26      |   |      | $ | .93       |      |  | $ | .84      
|                                                     |  |      |           |   |      |   |           |      |  |   |          



23



---

Notes to Consolidated Financial Statements



Note 14. Stock Options



The Company has adopted a qualified incentive stock option plan, which reserves 68,603 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 grant. On February
15, 2001, the Company amended the Qualified Incentive Stock Plan to increase the shares available under the ISO plan.



The Company also adopted a non-qualified stock option plan, which reserves 95,912 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 grant at not less than the fair market value of the stock at the date of grant. The life of such options shall not extend more than ten years
from the date of grant. On February 15, 2001, the Company amended the Non-qualified Stock Option Plan increasing the shares available under the plan.



Activity under Company plans during the years ended December 31, 2004, 2003 and 2002 is summarized below:



|                                   |  |                     |   |  |                    |   |  |                     |  |         |  
|---------------------------------- |  | ------------------- | - |  | ------------------ | - |  | ------------------- |  | ------- | -
|                                   |  | Qualified Plan      |   |  | Non-Qualified Plan |  
|                                   |  | Available For Grant |   |  | Granted            |   |  | Available For Grant |  | Granted |  
|Balance, December 31, 2001         |  | 16,104              |   |  | 79,189             |   |  | 2                   |  | 95,601  |  
|Granted                            |  |                    |   |  |                   |   |  |                    |  |        |  
|Exercised                          |  |                    |   |  |                   |   |  |                    |  | (2,343  | )
|Forfeited                          |  |                    |   |  |                   |   |  |                    |  |        |  
|Expired                            |  |                    |   |  |                   |   |  |                    |  |        |  
|                                   |  |                     |   |  |                    |   |  |                     |  |         |  
|Balance, December 31, 2002         |  | 16,104              |   |  | 79,189             |   |  | 2                   |  | 93,258  |  
|Surrey Bancorp conversion/exchange |  | 3,440               |   |  | 15,617             |   |  | 1                   |  | 18,651  |  
|Granted                            |  | (4,800              | ) |  | 4,800              |   |  |                    |  |        |  
|Exercised                          |  |                    |   |  | (10,928            | ) |  |                    |  | (10,000 | )
|Forfeited                          |  | 2,420               |   |  | (2,420             | ) |  |                    |  |        |  
|Expired                            |  |                    |   |  |                   |   |  |                    |  |        |  
|                                   |  |                     |   |  |                    |   |  |                     |  |         |  
|Balance, December 31, 2003         |  | 17,164              |   |  | 86,258             |   |  | 3                   |  | 101,909 |  
|Granted                            |  | (1,500              | ) |  | 1,500              |   |  |                    |  |        |  
|Exercised                          |  |                    |   |  | (34,819            | ) |  |                    |  | (6,000  | )
|Forfeited                          |  | 2,376               |   |  | (2,376             | ) |  |                    |  |        |  
|Expired                            |  |                    |   |  |                   |   |  |                    |  |        |  
|                                   |  |                     |   |  |                    |   |  |                     |  |         |  
|Balance, December 31, 2004         |  | 18,040              |   |  | 50,563             |   |  | 3                   |  | 95,909  |  
|                                   |  |                     |   |  |                    |   |  |                     |  |         |  



24



---

Notes to Consolidated Financial Statements



Note 14. Stock Options, continued



Additional information related to Company plans is detailed below:(3)



|                                                                               |  |      |           |   |      |   |           |      |  |   |          
|------------------------------------------------------------------------------ |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | ---------
|                                                                               |  | 2004 |           |   | 2003 |   |           | 2002
|Outstanding options:                                                           |  |      |           |   |      |   |           |      |  |   |          
|Exercise price, beginning of the year(1)                                       |  | $    | 6.27      |   |      | $ | 6.10      |      |  | $ | 6.10     
|Exercise price, end of the year(1)                                             |  | $    | 6.40      |   |      | $ | 6.27      |      |  | $ | 6.10     
|Range of exercise prices:                                                      |  |      |           |   |      |   |           |      |  |   |          
|From                                                                           |  | $    | 5.79      |   |      | $ | 5.79      |      |  | $ | 5.78     
|To                                                                             |  | $    | 14.75     |   |      | $ | 12.71     |      |  | $ | 9.47     
|Remaining contractual life in months(1)                                        |  |      | 45        |   |      |   | 55        |      |  |   | 65       
|                                                                               |  |      |          
|Exercisable options outstanding at December 31:                                |  |      |           |   |      |   |           |      |  |   |          
|Number                                                                         |  |      | 133,416   |   |      |   | 169,597   |      |  |   | 189,304  
|Exercise price(1)                                                              |  | $    | 6.40      |   |      | $ | 6.27      |      |  | $ | 6.08     
|                                                                               |  |      |          
|Weighted average exercise price of options:                                    |  |      |           |   |      |   |           |      |  |   |          
|Granted during the year                                                        |  | $    | 14.75     |   |      | $ | 12.71     |      |  | $ |         
|Exercised during the year                                                      |  | $    | 6.11      |   |      | $ | 5.79      |      |  | $ | 6.77     
|Forfeited during the year                                                      |  | $    | 5.79      |   |      | $ | 8.52      |      |  | $ |         
|Expired during the year                                                        |  | $    |          |   |      | $ |          |      |  | $ |         
|                                                                               |  |      |          
|Grant-date fair value:                                                         |  |      |           |   |      |   |           |      |  |   |          
|Options granted during the year                                                |  | $    | 7,582     |   |      | $ | 31,423    |      |  | $ |         
|                                                                               |  |      |          
|Significant assumptions used in determining fair value of options granted:     |  |      |           |   |      |   |           |      |  |   |          
|Risk-free interest rate                                                        |  |      | 4.24      | % |      |   | 4.06      | %    |  |   | n/a      
|Expected life in years                                                         |  |      | 10        |   |      |   | 10        |      |  |   | n/a      
|Expected dividends                                                             |  |      |          |   |      |   |          |      |  |   | n/a      
|Expected volatility                                                            |  |      | 56.15     | % |      |   | 10.22     | %    |  |   | n/a      
|                                                                               |  |      |          
|Results of operations:                                                         |  |      |           |   |      |   |           |      |  |   |          
|Compensation cost recognized in income for all stock-based compensation awards |  | $    |          |   |      | $ |          |      |  | $ |         
|                                                                               |  |      |           |   |      |   |           |      |  |   |          
|Pro forma net income(2)                                                        |  | $    | 1,691,509 |   |      | $ | 1,172,763 |      |  | $ | 1,033,088
|                                                                               |  |      |           |   |      |   |           |      |  |   |          
|Basic pro forma earnings per share(2)                                          |  | $    | 1.42      |   |      | $ | 1.02      |      |  | $ | 0.90     
|                                                                               |  |      |           |   |      |   |           |      |  |   |          
|Diluted pro forma earnings per share(2)                                        |  | $    | 1.25      |   |      | $ | 0.91      |      |  | $ | 0.83     
|                                                                               |  |      |           |   |      |   |           |      |  |   |          

---

|(1) | Weighted average
|--- | ----------------



|(2) | As if the fair value based method prescribed by SFAS No. 123 had been applied
|--- | -----------------------------------------------------------------------------



|(3) | Adjustment for the effects of a 20% common stock dividend in 1999, a 20% common stock
dividend in January 2000, and a 10% common stock dividend in 2001, and a 6 for 5 common stock exchange on May 1, 2003.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



25



---

Notes to Consolidated Financial Statements



Note 15. Income Taxes



Current and Deferred Income Tax Components



The components of income tax expense are as follows:



|         |  |      |           |   |      |   |          |      |  |   |          |  
|-------- |  | ---- | --------- | - | ---- | - | -------- | ---- |  | - | -------- | -
|         |  | 2004 |           |   | 2003 |   |          | 2002 | 
|Current  |  | $    | 1,099,365 |   |      | $ | 938,858  |      |  | $ | 774,753  |  
|Deferred |  |      | (100,641  | ) |      |   | (180,746 | )    |  |   | (134,727 | )
|         |  |      |           |   |      |   |          |      |  |   |          |  
|         |  | $    | 998,724   |   |      | $ | 758,112  |      |  | $ | 640,026  |  
|         |  |      |           |   |      |   |          |      |  |   |          |  



Rate Reconciliation



A reconciliation of expected income tax expense (benefit) computed at
the statutory federal income tax rate to income tax expense included in the statements of income is as follows:



|                     |  |      |         |      |   |         |  |   |        
|-------------------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                     |  | 2004 |         | 2003 |   | 2002   
|Expected tax expense |  | $    | 961,417 |      | $ | 686,629 |  | $ | 610,607
|Other                |  |      | 37,307  |      |   | 71,483  |  |   | 29,419 
|                     |  |      |         |      |   |         |  |   |        
|                     |  | $    | 998,724 |      | $ | 758,112 |  | $ | 640,026
|                     |  |      |         |      |   |         |  |   |        



Deferred Income Tax Analysis



The significant components of net deferred tax assets (primarily
Federal) at December 31, 2004 and 2003 are summarized as follows:



|                                                                                             |  |      |         |      |   |        
|-------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                                                                             |  | 2004 |         | 2003
|Deferred tax assets                                                                          |  |      |         |      |   |        
|Allowance for loan losses                                                                    |  | $    | 856,241 |      | $ | 660,941
|Investee timing differences                                                                  |  |      |        |      |   | 42,078 
|Net unrealized loss on securities available for sale                                         |  |      | 7,771   |      |   |       
|Lower of cost or market adjustment on loans transferred from available for sale to portfolio |  |      | 69,774  |      |   | 80,502 
|Other                                                                                        |  |      | 3,839   |      |   | 12,527 
|                                                                                             |  |      |         |      |   |        
|                                                                                             |  |      | 937,625 |      |   | 796,048
|                                                                                             |  |      |         |      |   |        
|Deferred tax liabilities                                                                     |  |      |         |      |   |        
|Net unrealized gain on securities available for sale                                         |  |      |        |      |   | 2,023  
|Depreciation                                                                                 |  |      | 222,436 |      |   | 191,987
|Other                                                                                        |  |      | 2,736   |      |   | 20     
|                                                                                             |  |      |         |      |   |        
|                                                                                             |  |      | 225,172 |      |   | 194,030
|                                                                                             |  |      |         |      |   |        
|Net deferred tax asset                                                                       |  | $    | 712,453 |      | $ | 602,018
|                                                                                             |  |      |         |      |   |        



26



---

Notes to Consolidated Financial Statements



Note 16. Commitments and Contingencies



Litigation



In the normal course of business the Company is involved in various legal proceedings. After consultation with legal counsel, management believes that any liability resulting from such proceedings will not be material
to the financial statements.



Financial Instruments with
Off-Balance-Sheet Risk



The Company is party to financial instruments
with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees,
credit risk in excess of the amount recognized in the balance sheets.



The
Companys exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The
Company uses the same credit policies in making commitments and conditional obligations as for on-balance-sheet instruments. A summary of the Companys commitments at December 31, 2004 and 2003 is as follows:



|                                                               |  |      |            |      |   |           
|-------------------------------------------------------------- |  | ---- | ---------- | ---- | - | ----------
|                                                               |  | 2004 |            | 2003
|Commitments to extend credit, including unused lines of credit |  | $    | 23,660,000 |      | $ | 20,186,000
|Standby letters of credit                                      |  |      | 1,163,000  |      |   | 938,000   
|                                                               |  |      |            |      |   |           
|                                                               |  | $    | 24,823,000 |      | $ | 21,124,000
|                                                               |  |      |            |      |   |           



Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customers creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Company upon extension of credit, is based on managements credit evaluation of the party. Collateral held varies, but may include accounts receivable, inventory, property and equipment,
residential real estate and income-producing commercial properties.



Standby
letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Company deems necessary. The commitments carry both fixed
and variable rates of interest.



Concentrations of Credit Risk



Substantially all of the Companys loans, commitments to extend
credit, and standby letters of credit have been granted to customers in the Companys market area and such customers are generally depositors of the Company. The concentrations of credit by type of loan are set forth in Note 4. The distribution
of commitments to extend credit approximates the distribution of loans outstanding. The Company, as a matter of policy, does not extend credit to any single borrower or group of related borrowers in excess of approximately $2,300,000 unless
guaranteed by SBA or USDA Rural Development Corporation. Although the Company has a reasonably diversified loan portfolio, the following industries are considered to be concentrations: medical offices and related, trucking, used car dealers, and
non-residential building operators.



27



---

Notes to Consolidated Financial Statements



Note 16. Commitments and Contingencies, continued



Other Commitments



The Company has entered into employment agreements with certain of its key officers covering duties, salary, benefits, provisions for
termination and Company obligations in the event of merger or acquisition.



Note 17. Regulatory Restrictions



Dividends



The Companys dividend payments are made from dividends received
from the Bank. The Bank, as a North Carolina banking corporation, may pay dividends only out of its retained earnings. However, regulatory authorities may limit payment of dividends by an bank when it is determined that such a limitation is in the
public interest and is necessary to ensure financial soundness of the Bank.



The Bank, as a North Carolina banking corporation, may pay dividends only out of undivided profits (retained earnings) as determined pursuant to North Carolina General Statutes Section 53-87. However, regulatory authorities may limit
payment of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure financial soundness of the bank.



Intercompany Transactions



The Banks legal lending limit on loans to the Company are governed by Federal Reserve Act 23A, and differ from legal lending limits on loans to external customers.
Generally, a bank may lend up to 10% of its capital and surplus to its Parent, if the loan is secured. If collateral is in the form of stocks, bonds, debentures or similar obligations, it must have a market value when the loan is made of at least
20% more than the amount of the loan, and if obligations of a state or political subdivision or agency thereof, it must have a market value of at least 10% more than the amount of the loan. If such loans are secured by obligations of the United
States or agencies thereof, or by notes, drafts, bills of exchange or bankers acceptances eligible for rediscount or purchase by a Federal Reserve Bank, requirements for collateral in excess of the loan amount do not apply. Under this
definition, the legal lending limit for the Bank on loans to the Company was approximately $910,000 at December 31, 2004. No 23A transactions were deemed to exist between the Company and the Bank at December 31, 2004.



Capital Requirements



The Company and the Bank are subject to various regulatory capital requirements administered
by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory (and possibly additional discretionary) actions by regulators that, if undertaken, could have a direct material effect on the Companys
consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Banks assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting practices. The Banks capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other
factors.



Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets, as all those terms are defined in the regulations.
Management believes, as of December 31, 2004, that the Bank meets all capital adequacy requirements to which it is subject.



As of December 31, 2004, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the following table. There are no conditions or events since
that notification that management believes have changed the institutions category.



28



---

Notes to Consolidated Financial Statements



Note 17. Regulatory Restrictions, continued



The Companys and Banks actual capital amounts (in thousands) and ratios are also presented in the
following table.



|                          |  |        |        |       |                                             |   |        |                                                                      |        |  |     |        |  |       |        |  |      |  
|------------------------- |  | ------ | ------ | ----- | ------------------------------------------- | - | ------ | -------------------------------------------------------------------- | ------ |  | --- | ------ |  | ----- | ------ |  | ---- | -
|                          |  | Actual |        |       | MinimumRequiredFor CapitalAdequacy Purposes |   |        | Minimum To BeWell CapitalizedUnderPrompt CorrectiveAction Provisions |       
|                          |  | Amount |        | Ratio |                                             |   | Amount |                                                                      | Ratio  |  |     | Amount |  | Ratio |       
|December 31, 2004:        |  |        |        |       |                                             |   |        |                                                                      |        |  |     |        |  |       |        |  |      |  
|Total Capital             |  |        |        |       |                                             |   |        |                                                                      |        |  |     |        |  |       |        |  |      |  
|(to Risk-Weighted Assets) |  |        |        |       |                                             |   |        |                                                                      |        |  |     |        |  |       |        |  |      |  
|Consolidated              |  | $      | 15,949 |       | 11.61                                       | % |        | $                                                                    | 10,987 |  | 8.0 | %      |  | $     | 13,734 |  | 10.0 | %
|Surrey Bank & Trust       |  | $      | 14,534 |       | 10.52                                       | % |        | $                                                                    | 11,054 |  | 8.0 | %      |  | $     | 13,817 |  | 10.0 | %
|Tier I Capital            |  |        |        |       |                                             |   |        |                                                                      |        |  |     |        |  |       |        |  |      |  
|(to Risk-Weighted Assets) |  |        |        |       |                                             |   |        |                                                                      |        |  |     |        |  |       |        |  |      |  
|Consolidated              |  | $      | 14,225 |       | 10.36                                       | % |        | $                                                                    | 5,493  |  | 4.0 | %      |  | $     | 8,240  |  | 6.0  | %
|Surrey Bank & Trust       |  | $      | 12,800 |       | 9.26                                        | % |        | $                                                                    | 5,527  |  | 4.0 | %      |  | $     | 8,290  |  | 6.0  | %
|Tier I Capital            |  |        |        |       |                                             |   |        |                                                                      |        |  |     |        |  |       |        |  |      |  
|(to Average Assets)       |  |        |        |       |                                             |   |        |                                                                      |        |  |     |        |  |       |        |  |      |  
|Consolidated              |  | $      | 14,225 |       | 8.98                                        | % |        | $                                                                    | 6,337  |  | 4.0 | %      |  | $     | 7,963  |  | 5.0  | %
|Surrey Bank & Trust       |  | $      | 12,800 |       | 8.08                                        | % |        | $                                                                    | 6,337  |  | 4.0 | %      |  | $     | 7,921  |  | 5.0  | %
|                          |  |        |        |       |                                             |  
|December 31, 2003:        |  |        |        |       |                                             |   |        |                                                                      |        |  |     |        |  |       |        |  |      |  
|Total Capital             |  |        |        |       |                                             |   |        |                                                                      |        |  |     |        |  |       |        |  |      |  
|Consolidated              |  | $      | 13,874 |       | 11.52                                       | % |        | $                                                                    | 9,636  |  | 8.0 | %      |  | $     | 12,045 |  | 10.0 | %
|Surrey Bank & Trust       |  | $      | 12,201 |       | 10.13                                       | % |        | $                                                                    | 9,636  |  | 8.0 | %      |  | $     | 12,045 |  | 10.0 | %
|Tier I Capital            |  |        |        |       |                                             |   |        |                                                                      |        |  |     |        |  |       |        |  |      |  
|(to Risk-Weighted Assets) |  |        |        |       |                                             |   |        |                                                                      |        |  |     |        |  |       |        |  |      |  
|Consolidated              |  | $      | 12,361 |       | 10.26                                       | % |        | $                                                                    | 4,818  |  | 4.0 | %      |  | $     | 7,227  |  | 6.0  | %
|Surrey Bank & Trust       |  | $      | 10,687 |       | 8.87                                        | % |        | $                                                                    | 4,818  |  | 4.0 | %      |  | $     | 7,227  |  | 6.0  | %
|Tier I Capital            |  |        |        |       |                                             |   |        |                                                                      |        |  |     |        |  |       |        |  |      |  
|(to Average Assets)       |  |        |        |       |                                             |   |        |                                                                      |        |  |     |        |  |       |        |  |      |  
|Consolidated              |  | $      | 12,361 |       | 10.50                                       | % |        | $                                                                    | 4,709  |  | 4.0 | %      |  | $     | 5,886  |  | 5.0  | %
|Surrey Bank & Trust       |  | $      | 10,687 |       | 8.13                                        | % |        | $                                                                    | 5,259  |  | 4.0 | %      |  | $     | 6,574  |  | 5.0  | %



Note 18. Transactions with Related
Parties



The Company has entered into transactions with its directors,
significant shareholders and their affiliates (related parties). Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same
time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features.



Aggregate loan transactions with related parties were as follows:



|                   |  |      |           |   |      |   |            |  
|------------------ |  | ---- | --------- | - | ---- | - | ---------- | -
|                   |  | 2004 |           |   | 2003 |  
|Balance, beginning |  | $    | 2,035,486 |   |      | $ | 1,661,882  |  
|New loans          |  |      | 969,839   |   |      |   | 1,455,880  |  
|Repayments         |  |      | (361,768  | ) |      |   | (1,082,276 | )
|                   |  |      |           |   |      |   |            |  
|Balance, ending    |  | $    | 2,643,577 |   |      | $ | 2,035,486  |  
|                   |  |      |           |   |      |   |            |  



29



---

Notes to Consolidated Financial Statements



Note 19. Investment in Limited Liability Company



Prior to March 1, 2003, the Company participated in a limited liability company with Friendly Auto Finance, Inc. (Friendly Finance, LLC). On
March 1, 2003, the Company acquired the minority interest in exchange for the satisfaction of other commitments of the holder of the minority interest. Friendly Finance, LLC purchases sales finance contracts from automobile dealers in the
Companys trade area. As of December 31, 2004 and 2003, the LLCs summarized unaudited balance sheet and for each of the three years in the period ended December 31, 2004 the statements of income and cash flows were as follows:



Balance Sheets

December 31, 2004 and 2003



|                                                                                                |  |      |           |      |   |          
|----------------------------------------------------------------------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                                                                                |  | 2004 |           | 2003
|Assets                                                                                          |  |      |           |      |   |          
|Cash and due from banks                                                                         |  | $    | 492,375   |      | $ | 52,167   
|Interest-bearing deposits with banks                                                            |  |      | 21,430    |      |   | 63,279   
|Loans, net of allowance for loan losses of $189,828 and $324,964 in 2004 and 2003, respectively |  |      | 1,028,055 |      |   | 1,515,953
|Property and equipment, net                                                                     |  |      | 11,970    |      |   | 12,527   
|Other assets                                                                                    |  |      | 113,529   |      |   | 39,797   
|                                                                                                |  |      |           |      |   |          
|                                                                                                |  | $    | 1,667,359 |      | $ | 1,683,723
|                                                                                                |  |      |           |      |   |          
|Liabilities and Capital                                                                         |  |      |           |      |   |          
|Liabilities                                                                                     |  |      |           |      |   |          
|Long-term debt                                                                                  |  | $    |          |      | $ | 140,000  
|Other liabilities                                                                               |  |      | 22,909    |      |   | 68,373   
|                                                                                                |  |      |           |      |   |          
|                                                                                                |  |      | 22,909    |      |   | 208,373  
|                                                                                                |  |      |           |      |   |          
|Capital                                                                                         |  |      |           |      |   |          
|Equity                                                                                          |  |      | 642,078   |      |   | 600,000  
|Retained earnings                                                                               |  |      | 1,002,372 |      |   | 875,350  
|                                                                                                |  |      |           |      |   |          
|                                                                                                |  |      | 1,644,450 |      |   | 1,475,350
|                                                                                                |  |      |           |      |   |          
|                                                                                                |  | $    | 1,667,359 |      | $ | 1,683,723
|                                                                                                |  |      |           |      |   |          



Statements of
Income

For the years ended December 31, 2004, 2003 and 2002



|                                     |  |      |         |   |      |   |          |      |  |   |        
|------------------------------------ |  | ---- | ------- | - | ---- | - | -------- | ---- |  | - | -------
|                                     |  | 2004 |         |   | 2003 |   |          | 2002
|Income                               |  |      |         |   |      |   |          |      |  |   |        
|Interest income                      |  | $    | 227,966 |   |      | $ | 525,512  |      |  | $ | 955,577
|Other income                         |  |      | 30,637  |   |      |   | 41,938   |      |  |   | 27,169 
|                                     |  |      |         |   |      |   |          |      |  |   |        
|Total income                         |  |      | 258,603 |   |      |   | 567,450  |      |  |   | 982,746
|                                     |  |      |         |   |      |   |          |      |  |   |        
|Expenses                             |  |      |         |   |      |   |          |      |  |   |        
|Interest expense                     |  |      | 546     |   |      |   | 50,311   |      |  |   | 141,201
|Provision for loan losses (recovery) |  |      | (58,445 | ) |      |   | (168,601 | )    |  |   | 307,753
|Salaries and employee benefits       |  |      | 58,298  |   |      |   | 113,017  |      |  |   | 146,773
|Occupancy expense                    |  |      | 6,935   |   |      |   | 10,770   |      |  |   | 10,524 
|Equipment expense                    |  |      | 6,149   |   |      |   | 11,027   |      |  |   | 14,437 
|Other expense                        |  |      | 118,098 |   |      |   | 162,606  |      |  |   | 90,638 
|                                     |  |      |         |   |      |   |          |      |  |   |        
|Total expense                        |  |      | 131,581 |   |      |   | 179,130  |      |  |   | 711,326
|                                     |  |      |         |   |      |   |          |      |  |   |        
|Net income                           |  | $    | 127,022 |   |      | $ | 388,320  |      |  | $ | 271,420
|                                     |  |      |         |   |      |   |          |      |  |   |        



30



---

Notes to Consolidated Financial Statements



Note 19. Investment in Limited Liability Company, continued



Statements of Cash Flows

For the years ended December 31, 2004, 2003 and 2002



|                                                                                 |  |      |          |   |      |   |            |      |  |   |          |  
|-------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | ---------- | ---- |  | - | -------- | -
|                                                                                 |  | 2004 |          |   | 2003 |   |            | 2002 | 
|Cash flows from operating activities                                             |  |      |          |   |      |   |            |      |  |   |          |  
|Net income                                                                       |  | $    | 127,022  |   |      | $ | 388,320    |      |  | $ | 271,420  |  
|Adjustments to reconcile net income to net cash provided by operating activities |  |      |          |   |      |   |            |      |  |   |          |  
|Depreciation                                                                     |  |      | 1,422    |   |      |   | 6,751      |      |  |   | 6,052    |  
|Loss on the sale of fixed assets                                                 |  |      | 11,277   |   |      |   |           |      |  |   |         |  
|Provision for loan losses (recovery)                                             |  |      | (58,445  | ) |      |   | (168,601   | )    |  |   | 307,753  |  
|Net increase in other assets                                                     |  |      | (31,654  | ) |      |   | (21,269    | )    |  |   | (6,845   | )
|Net increase (decrease) in other liabilities                                     |  |      | (45,464  | ) |      |   | (73,604    | )    |  |   | 4,432    |  
|                                                                                 |  |      |          |   |      |   |            |      |  |   |          |  
|Net cash provided by operating activities                                        |  |      | 4,158    |   |      |   | 131,597    |      |  |   | 582,812  |  
|                                                                                 |  |      |          |   |      |   |            |      |  |   |          |  
|Cash flows from investing activities                                             |  |      |          |   |      |   |            |      |  |   |          |  
|Net (increase) decrease in interest-bearing deposits with banks                  |  |      | 41,849   |   |      |   | 74,634     |      |  |   | (4,833   | )
|Purchase of property and equipment                                               |  |      | (13,392  | ) |      |   | (4,923     | )    |  |   | (6,318   | )
|Proceeds from the sale of fixed assets                                           |  |      | 1,250    |   |      |   |           |      |  |   |         |  
|Net decrease in loans                                                            |  |      | 546,343  |   |      |   | 1,834,008  |      |  |   | 277,873  |  
|                                                                                 |  |      |          |   |      |   |            |      |  |   |          |  
|Net cash provided in investing activities                                        |  |      | 576,050  |   |      |   | 1,903,719  |      |  |   | 266,722  |  
|                                                                                 |  |      |          |   |      |   |            |      |  |   |          |  
|Cash flows from financing activities                                             |  |      |          |   |      |   |            |      |  |   |          |  
|Net increase in long-term debt                                                   |  |      | (140,000 | ) |      |   | (2,185,000 | )    |  |   | (675,000 | )
|                                                                                 |  |      |          |   |      |   |            |      |  |   |          |  
|Net cash provided (used) by financing activities                                 |  |      | (140,000 | ) |      |   | (2,185,000 | )    |  |   | (675,000 | )
|                                                                                 |  |      |          |   |      |   |            |      |  |   |          |  
|Net increase (decrease) in cash and due from banks                               |  |      | 440,208  |   |      |   | (149,684   | )    |  |   | 174,534  |  
|Cash and cash equivalents, beginning                                             |  |      | 52,167   |   |      |   | 201,851    |      |  |   | 27,317   |  
|                                                                                 |  |      |          |   |      |   |            |      |  |   |          |  
|Cash and cash equivalents, ending                                                |  | $    | 492,375  |   |      | $ | 52,167     |      |  | $ | 201,851  |  
|                                                                                 |  |      |          |   |      |   |            |      |  |   |          |  
|Supplemental disclosure of non-cash transactions                                 |  |      |          |   |      |   |            |      |  |   |          |  
|Non-cash transactions related to acquisition of minority interest in subsidiary: |  |      |          |   |      |   |            |      |  |   |          |  
|Cancellation of loan and interest receivable                                     |  |      |         |   |      |   | 422,984    |      |  |   |         |  
|Cancellation of loans receivable from recourse obligations                       |  |      |         |   |      |   | 243,850    |      |  |   |         |  
|Addition to allowance for loans losses                                           |  |      |         |   |      |   | 57,852     |      |  |   |         |  
|                                                                                 |  |      |          |   |      |   |            |      |  |   |          |  
|Total transaction                                                                |  | $    |         |   |      | $ | 724,686    |      |  | $ |         |  
|                                                                                 |  |      |          |   |      |   |            |      |  |   |          |  



31



---

Notes to Consolidated Financial Statements



Note 20. Segment Reporting



The Company has two reportable segments, the Bank and Friendly Finance, LLC (subsidiary). The Bank provides mortgage, consumer, and commercial loans. Friendly 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 years ended December
31, 2004, 2003 and 2002 is as follows:



|                                   |  |      |             |                      |   |           |                         |  |   |            |   |  |                    |          |   |  |   |            
|---------------------------------- |  | ---- | ----------- | -------------------- | - | --------- | ----------------------- |  | - | ---------- | - |  | ------------------ | -------- | - |  | - | -----------
|                                   |  | Bank |             | FriendlyFinance, LLC |   |           | IntersegmentElimination |  |   | Other      |   |  | ConsolidatedTotals
|2004                               |  |      |             |                      |   |           |                         |  |   |            |   |  |                    |          |   |  |   |            
|Net interest income                |  | $    | 5,646,880   |                      | $ | 227,420   |                         |  | $ |           |   |  | $                  |         |   |  | $ | 5,874,300  
|Other revenue  external customers |  |      | 2,406,139   |                      |   | 30,637    |                         |  |   |           |   |  |                    |         |   |  |   | 2,436,776  
|Depreciation and amortization      |  |      | 398,714     |                      |   | 1,422     |                         |  |   |           |   |  |                    |         |   |  |   | 400,136    
|Provision for loan losses          |  |      | 383,477     |                      |   | (58,445   | )                       |  |   |           |   |  |                    |         |   |  |   | 325,032    
|Net income                         |  |      | 1,701,950   |                      |   | 127,022   |                         |  |   |           |   |  |                    |         |   |  |   | 1,828,972  
|Assets                             |  |      | 158,108,935 |                      |   | 1,667,359 |                         |  |   | (2,513,341 | ) |  |                    |         |   |  |   | 157,262,953
|                                   |  |      |             |                      |  
|2003                               |  |      |             |                      |   |           |                         |  |   |            |   |  |                    |          |   |  |   |            
|Net interest income                |  | $    | 4,943,839   |                      | $ | 475,201   |                         |  | $ |           |   |  | $                  |         |   |  | $ | 5,419,040  
|Other revenue  external customers |  |      | 2,046,647   |                      |   | 41,938    |                         |  |   |           |   |  |                    |         |   |  |   | 2,088,585  
|Depreciation and amortization      |  |      | 362,725     |                      |   | 6,751     |                         |  |   |           |   |  |                    |         |   |  |   | 369,476    
|Provision for loan losses          |  |      | 547,002     |                      |   | (168,601  | )                       |  |   |           |   |  |                    |         |   |  |   | 378,401    
|Net income                         |  |      | 873,065     |                      |   | 388,320   |                         |  |   |           |   |  |                    |         |   |  |   | 1,261,385  
|Assets                             |  |      | 135,397,988 |                      |   | 1,683,723 |                         |  |   | (2,004,706 | ) |  |                    |         |   |  |   | 135,077,005
|                                   |  |      |             |                      |  
|2002                               |  |      |             |                      |   |           |                         |  |   |            |   |  |                    |          |   |  |   |            
|Net interest income                |  | $    | 3,765,616   |                      | $ | 814,376   |                         |  | $ |           |   |  | $                  |         |   |  | $ | 4,579,992  
|Other revenue  external customers |  |      | 1,443,435   |                      |   | 27,169    |                         |  |   |           |   |  |                    |         |   |  |   | 1,470,604  
|Depreciation and amortization      |  |      | 327,813     |                      |   | 6,052     |                         |  |   |           |   |  |                    |         |   |  |   | 333,865    
|Provision for loan losses          |  |      | 343,252     |                      |   | 307,753   |                         |  |   |           |   |  |                    |         |   |  |   | 651,005    
|Net income                         |  |      | 884,456     |                      |   | 271,420   |                         |  |   |           |   |  |                    | (108,568 | ) |  |   | 1,047,308  
|Assets                             |  |      | 103,990,688 |                      |   | 4,278,694 |                         |  |   | (1,724,850 | ) |  |                    |         |   |  |   | 106,544,532



Amount included in the
other column is minority shareholders 40% interest in net income of Friendly Finance, LLC.



32



---

Notes to Consolidated Financial Statements



Note 20. Segment Reporting, continued



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



The 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 December 31, 2004. The Bank does allocate income taxes to the segments. Other revenue represents noninterest income which is also allocated to the segments. The Bank includes an insurance and investment agency in its Bank segment above. The
Bank does not have any single external customer from which it derives 10 percent or more of its revenues and operates in one geographical area.



Note 21. Parent Company Activity



Surrey Bancorp owns all of the outstanding shares of the Bank. Summary financial statements of Surrey Bancorp follow:



Balance Sheets

December 31, 2004 and 2003



|                                              |  |      |            |   |      |   |           
|--------------------------------------------- |  | ---- | ---------- | - | ---- | - | ----------
|                                              |  | 2004 |            |   | 2003
|Assets                                        |  |      |            |   |      |   |           
|Cash and due from banks                       |  | $    | 122,967    |   |      | $ | 152,470   
|Interest-bearing deposits with banks          |  |      | 1,300,000  |   |      |   | 1,550,000 
|Investment in subsidiaries                    |  |      | 13,620,094 |   |      |   | 11,400,132
|Other assets                                  |  |      | 32,347     |   |      |   | 934       
|                                              |  |      |            |   |      |   |           
|                                              |  | $    | 15,075,408 |   |      | $ | 13,103,536
|                                              |  |      |            |   |      |   |           
|Liabilities and Capital                       |  |      |            |   |      |   |           
|Liabilities                                   |  |      |            |   |      |   |           
|Dividends payable                             |  | $    | 29,987     |   |      | $ | 30,070    
|                                              |  |      |            |   |      |   |           
|                                              |  |      | 29,987     |   |      |   | 30,070    
|                                              |  |      |            |   |      |   |           
|                                              |  |     
|Capital                                       |  |      |            |   |      |   |           
|Preferred stock                               |  |      | 2,620,325  |   |      |   | 2,620,325 
|Common stock                                  |  |      | 8,100,261  |   |      |   | 7,822,387 
|Retained earnings                             |  |      | 4,337,224  |   |      |   | 2,627,529 
|Accumulated other comprehensive income (loss) |  |      | (12,389    | ) |      |   | 3,225     
|                                              |  |      |            |   |      |   |           
|                                              |  |      | 15,045,421 |   |      |   | 13,073,466
|                                              |  |      |            |   |      |   |           
|                                              |  | $    | 15,075,408 |   |      | $ | 13,103,536
|                                              |  |      |            |   |      |   |           



33



---

Notes to Consolidated Financial Statements



Note 21. Parent Company Activity, continued



Statements of Income

For the periods ended December 31, 2004 and 2003



|                                            |  |      |           |   |      |   |         |  
|------------------------------------------- |  | ---- | --------- | - | ---- | - | ------- | -
|                                            |  | 2004 |           |   | 2003 |  
|Income                                      |  |      |           |   |      |   |         |  
|Equity income from Surrey Bank & Trust      |  | $    | 1,835,578 |   |      | $ | 791,314 |  
|Interest income                             |  |      | 28,211    |   |      |   | 11,359  |  
|                                            |  |      |           |   |      |   |         |  
|Total income                                |  |      | 1,863,789 |   |      |   | 802,673 |  
|                                            |  |      |           |   |      |   |         |  
|Expenses                                    |  |      |           |   |      |   |         |  
|Other expense                               |  |      | 38,219    |   |      |   | 14,109  |  
|                                            |  |      |           |   |      |   |         |  
|Total expense                               |  |      | 38,219    |   |      |   | 14,109  |  
|                                            |  |      |           |   |      |   |         |  
|Income before income taxes                  |  |      | 1,825,570 |   |      |   | 788,564 |  
|Income tax benefit                          |  |      | 3,402     |   |      |   | 935     |  
|                                            |  |      |           |   |      |   |         |  
|Net income                                  |  | $    | 1,828,972 |   |      | $ | 789,499 |  
|Preferred stock dividends                   |  |      | (119,277  | ) |      |   | (66,349 | )
|                                            |  |      |           |   |      |   |         |  
|Net income available to common stockholders |  | $    | 1,709,695 |   |      | $ | 723,150 |  
|                                            |  |      |           |   |      |   |         |  



Statements of
Cash Flows

For the periods ended December 31, 2004 and 2003



|                                                                                |  |      |            |   |      |   |            |  
|------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                                                                |  | 2004 |            |   | 2003 |  
|Cash flows from operating activities                                            |  |      |            |   |      |   |            |  
|Net income                                                                      |  | $    | 1,828,972  |   |      | $ | 789,499    |  
|Adjustment to reconcile net income to net cash provided by operating activities |  |      |            |   |      |   |            |  
|Equity in undistributed earnings of subsidiary                                  |  |      | (1,835,578 | ) |      |   | (791,314   | )
|Net increase in other assets                                                    |  |      | (31,412    | ) |      |   | (935       | )
|                                                                                |  |      |            |   |      |   |            |  
|Net cash used by operating activities                                           |  |      | (38,018    | ) |      |   | (2,750     | )
|                                                                                |  |      |            |   |      |   |            |  
|                                                                                |  |     
|Cash flows from investing activities                                            |  |      |            |   |      |   |            |  
|Net (increase) decrease in interest-bearing deposits with banks                 |  |      | 250,000    |   |      |   | (1,550,000 | )
|Net increase in investment in subsidiaries                                      |  |      | (400,000   | ) |      |   | (1,000,000 | )
|                                                                                |  |      |            |   |      |   |            |  
|Net cash used in investing activities                                           |  |      | (150,000   | ) |      |   | (2,550,000 | )
|                                                                                |  |      |            |   |      |   |            |  
|                                                                                |  |     
|Cash flows from financing activities                                            |  |      |            |   |      |   |            |  
|Preferred stock issued                                                          |  |      |           |   |      |   | 2,620,325  |  
|Common stock options exercised                                                  |  |      | 249,865    |   |      |   | 121,173    |  
|Tax benefit of non-employee stock option deduction                              |  |      | 28,009     |   |      |   |           |  
|Dividends paid                                                                  |  |      | (119,360   | ) |      |   | (36,278    | )
|                                                                                |  |      |            |   |      |   |            |  
|Net cash provided by financing activities                                       |  |      | 158,514    |   |      |   | 2,705,220  |  
|                                                                                |  |      |            |   |      |   |            |  
|Net increase in cash and due from banks                                         |  |      | (29,504    | ) |      |   |            |  
|                                                                                |  |     
|Cash and cash equivalents, beginning                                            |  |      | 152,470    |   |      |   |           |  
|                                                                                |  |      |            |   |      |   |            |  
|Cash and cash equivalents, ending                                               |  | $    | 122,966    |   |      | $ | 152,470    |  
|                                                                                |  |      |            |   |      |   |            |  
|Supplemental disclosure of non-cash transactions                                |  |      |            |   |      |   |            |  
|Non-cash transactions related to acquisition of Surrey Bank & Trust:            |  |      |            |   |      |   |            |  
|Issuance of common stock in exchange for common stock of Surrey Bank & Trust    |  | $    |           |   |      | $ | 7,704,439  |  
|Retained earnings acquired in exchange                                          |  |      |           |   |      |   | 1,904,379  |  
|Increase in investment in Surrey Bank & Trust                                   |  |      |           |   |      |   | (9,608,818 | )



34



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Notes to Consolidated Financial Statements



Note 22. Subsequent Event



Effective February 18, 2005, the Company established a nonqualified deferred compensation plan under which directors may elect to defer their director fees. Participating
directors will receive an additional 30% matching contribution and the amounts deferred will be invested in a rabbi trust. Additionally, the Company established a supplemental executive retirement plan for certain executive officers. The future
benefits of the plans will be funded primarily by life insurance policies on the executives and two of the directors. The Company, as owner of the policies, will retain and interest in the life insurance proceeds and a 100% interest in the cash
surrender value of the policies.



35



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Independent Auditors Report



Board of
Directors and Stockholders

Surrey Bancorp

Mount Airy, North
Carolina



We have audited the consolidated balance sheets of Surrey Bancorp and
subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders equity and cash flows for each of the three years in the period ended December 31, 2004. These consolidated financial statements are
the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with auditing standards established by the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for
our opinion.



In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of Surrey Bancorp and subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.



Galax, Virginia

January 14, 2005, except for Note 22, as to which the date
is February 22, 2005.



36



---

---

Managements Discussion and Analysis

---



37



---

Managements Discussion and Analysis



General



Surrey Bancorp was formed on May 1, 2003 and was created for the purpose of acquiring all the outstanding shares of common stock of Surrey Bank & Trust.



Surrey Bank & Trust was incorporated on July 15, 1996 as a North Carolina banking
corporation and opened for business on July 22, 1996. The Bank operates for the primary purpose of serving the banking needs of individuals and small to medium sized businesses in northern Surry County and the surrounding area, while developing
personal, hometown associations with these customers. The Bank offers a wide range of banking services including checking and savings accounts; commercial, installment, mortgage and personal loans; safe deposit boxes; and other associated services.
Through its subsidiaries, Surrey Investment Services, Inc. and Friendly Finance, LLC, the Bank offers insurance and investment products and sales finance services, respectively. The Banks primary sources of revenue are interest income from its
commercial and real estate lending activities and, to a lesser extent, from its investment portfolio. The Bank also earns fees from lending and deposit activities. The major expenses of the Bank are interest on deposit accounts and general and
administrative expenses, such as salaries, occupancy and related expenses.



Primary Market Area



The Banks market area
consists of an area extending from Surry County, with offices in Mount Airy and Pilot Mountain, North Carolina, north into the southern portions of Carroll and Patrick Counties, Virginia. Mount Airy is the industrial and trading center of Surry
County with a population of approximately 8,500 people living in the city limits and 30,000 in the metropolitan area. The total population of Surry County is approximately 72,000 people. Mount Airy is served by Interstate Highway 77 and U.S.
Highways 52 and 601. Surry County has a civilian labor force of over 35,000. Major industries include manufacturing, furniture, rubber and fabricated metals, and lumber and wood. The Bank has a branch office in Stuart, Virginia, which is located in
Patrick County, Virginia. The primary industries found in Patrick County are lumber and wood, textiles and agricultural.



Managements Discussion and Analysis of Operations



Managements Discussion and Analysis is provided to assist in the understanding and evaluation of the Companys financial condition and its results of
operations. The following discussion should be read in conjunction with the Companys financial statements and related notes.



Critical Accounting Policies



Surrey Bancorps financial statements are prepared in accordance with accounting principles generally accepted in the United States (GAAP). The notes to the audited
consolidated financial statements included in the Annual Report on Form 10-KSB for the year ended December 31, 2004 contain a summary of its significant accounting policies. Management believes the Companys policies with respect to the
methodology for the determination of the allowance for loan losses, and asset impairment judgments, such as the recoverability of intangible assets, involve a higher degree of complexity and require management to make difficult and subjective
judgments that often require assumptions or estimates about highly uncertain matters. Accordingly, management considers the policies related to those areas as critical.



The allowance for loan losses is an estimate of the losses that may be sustained in the loan portfolio. The allowance is based on two basic
principles of accounting: (i) Statements of Financial Accounting Standards (SFAS) 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimable, and (ii) SFAS 114,
Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market, and the loan
balance.



38



---

Managements Discussion and Analysis



The allowance for loan losses has three basic components: (i) the formula allowance, (ii) the specific allowance, and
(iii) the unallocated allowance. Each of these components is determined based upon estimates that can and do change when the actual events occur. The formula allowance used a historical loss view as an indicator of future losses and, as a
result, could differ from the loss incurred in the future. However, since this history is updated with the most recent loss information, the errors that might otherwise occur are mitigated. The specific allowance uses various techniques to arrive at
an estimate of loss. Historical loss information, expected cash flows and fair market value of collateral are used to estimate these losses. The use of these values is inherently subjective and our actual losses could be greater or less that the
estimates. The unallocated allowance captures losses that are attributable to various economic events, industry or geographic sectors whose impact on the portfolio have occurred but have yet to be recognized in either the formula or specific
allowance.



Accounting for intangible assets is as prescribed by SFAS 142,
Goodwill and Other Intangible Assets. The Company accounts for recognized intangible assets based on their estimated useful lives. Intangible assets with finite useful lives are amortized, while intangible assets with an indefinite useful life are
not amortized.



Estimated useful lives of intangible assets are based on an
analysis of pertinent factors, including (as applicable):



| |  |  | the expected use of the asset;
| | - |  | ------------------------------



| |  |  | the expected useful life of another asset or a group of assets to which the useful life of the intangible asset may relate;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | any legal, regulatory, or contractual provisions that may limit the useful life;
| | - |  | --------------------------------------------------------------------------------



| |  |  | any legal, regulatory, or contractual provisions that enable renewal or extension of the assets legal or contractual life without substantial cost;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the effects of obsolescence, demand, competition, and other economic factors; and
| | - |  | ---------------------------------------------------------------------------------



| |  |  | the level of maintenance expenditures required to obtain the expected future cash flows from the asset.
| | - |  | -------------------------------------------------------------------------------------------------------



Straight-line amortization is used to expense recognized amortizable intangible assets since a method that more closely reflects the pattern
in which the economic benefits of the intangible assets are consumed cannot reliably be determined. Intangible assets are not written off in the period of acquisition unless they become impaired during that period.



The Company evaluates the remaining useful life of each intangible asset that is being
amortized each reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization. If the estimate of the intangible assets remaining useful life is changed, the remaining carrying amount
of the intangible asset shall be amortized prospectively of that revised remaining useful life.



If an intangible asset that is being amortized is subsequently determined to have an indefinite useful life, the asset will be tested for impairment. That intangible asset will no longer be amortized and will be
accounted for in the same manner as intangible assets that are not subject to amortization.



Intangible assets that are not subject to amortization are reviewed for impairment in accordance with SFAS 121 and tested annually, or more frequently if events or changes in circumstances indicate that the asset
might be impaired. The impairment test consists of a comparison of the fair value of the intangible asset with its carrying amount. If the carrying amount of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount
equal to that excess. After an impairment loss is recognized, the adjusted carrying amount of the intangible asset becomes its new accounting basis. Subsequent reversal of a previously recognized impairment loss is not allowed. Currently, the
Companys only intangible asset is goodwill from the purchase of two insurance agencies.



39



---

Managements Discussion and Analysis



Table 1. Net Interest Income and Average Balances (dollars in thousands)



|                                             |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |       |                |      |   |                        |   |            |   |  |   |       |  |      |  
|-------------------------------------------- |  | -------------------------- | ------- | - | ---------------------- | - | ---------- | ---- | ---- | -------------- |  | - | ---------------------- | - | ---------- | - | ----- | -------------- | ---- | - | ---------------------- | - | ---------- | - |  | - | ----- |  | ---- | -
|                                             |  | Periods Ended December 31, |        
|                                             |  | 2004                       |         |   | 2003                   |   |            | 2002 |     
|                                             |  | AverageBalance             |         |   | InterestIncome/Expense |   | Yield/Cost |      |      | AverageBalance |  |   | InterestIncome/Expense |   | Yield/Cost |   |       | AverageBalance |      |   | InterestIncome/Expense |   | Yield/Cost |  
|Interest-earning assets:                     |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |       |                |      |   |                        |   |            |   |  |   |       |  |      |  
|Deposits in other banks                      |  | $                          | 13,620  |   |                        | $ | 139        |      | 1.02 | %              |  | $ | 5,205                  |   |            | $ | 26    |                | .50  | % |                        | $ | 6,294      |   |  | $ | 53    |  | .84  | %
|Taxable investment securities                |  |                            | 3,803   |   |                        |   | 82         |      | 2.17 | %              |  |   | 3,878                  |   |            |   | 85    |                | 2.19 | % |                        |   | 3,795      |   |  |   | 129   |  | 3.40 | %
|Non-taxable investments                      |  |                            | 18      |   |                        |   | 1          |      | 2.49 | %              |  |   | 101                    |   |            |   | 3     |                | 2.97 | % |                        |   | 146        |   |  |   | 4     |  | 2.74 | %
|Federal funds sold                           |  |                            | 191     |   |                        |   | 3          |      | 1.66 | %              |  |   |                       |   |            |   |      |                |     | % |                        |   | 64         |   |  |   | 1     |  | 1.56 | %
|Loans                                        |  |                            | 127,726 |   |                        |   | 8,082      |      | 6.33 | %              |  |   | 104,648                |   |            |   | 7,270 |                | 6.95 | % |                        |   | 80,748     |   |  |   | 6,489 |  | 8.04 | %
|                                             |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |       |                |      |   |                        |   |            |   |  |   |       |  |      |  
|Total interest-earning assets                |  |                            | 145,358 |   |                        |   | 8,307      |      |      |                |  |   | 113,832                |   |            |   | 7,384 |                |      |   |                        |   | 91,047     |   |  |   | 6,676 |  |      |  
|                                             |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |       |                |      |   |                        |   |            |   |  |   |       |  |      |  
|Yield on average interest-earning assets     |  |                            |         |   |                        |   |            |      | 5.72 | %              |  |   |                        |   |            |   |       |                | 6.49 | % |                        |   |            |   |  |   |       |  | 7.33 | %
|                                             |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |       |                |      |   |                        |   |            |   |  |   |       |  |      |  
|                                             |  |                            |         |   |                        |   |            |      |     
|Noninterest-earning assets:                  |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |       |                |      |   |                        |   |            |   |  |   |       |  |      |  
|Cash and due from banks                      |  |                            | 1,780   |   |                        |   |            |      |      |                |  |   | 1,370                  |   |            |   |       |                |      |   |                        |   | 1,134      |   |  |   |       |  |      |  
|Property and equipment                       |  |                            | 4,233   |   |                        |   |            |      |      |                |  |   | 3,885                  |   |            |   |       |                |      |   |                        |   | 3,013      |   |  |   |       |  |      |  
|Other real estate owned                      |  |                            |        |   |                        |   |            |      |      |                |  |   |                       |   |            |   |       |                |      |   |                        |   |           |   |  |   |       |  |      |  
|Interest receivable and other                |  |                            | 1,966   |   |                        |   |            |      |      |                |  |   | 1,347                  |   |            |   |       |                |      |   |                        |   | 1,139      |   |  |   |       |  |      |  
|Allowance for loan losses                    |  |                            | (2,165  | ) |                        |   |            |      |      |                |  |   | (2,002                 | ) |            |   |       |                |      |   |                        |   | (1,427     | ) |  |   |       |  |      |  
|                                             |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |       |                |      |   |                        |   |            |   |  |   |       |  |      |  
|Total noninterest-earning assets             |  |                            | 5,814   |   |                        |   |            |      |      |                |  |   | 4,600                  |   |            |   |       |                |      |   |                        |   | 3,859      |   |  |   |       |  |      |  
|                                             |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |       |                |      |   |                        |   |            |   |  |   |       |  |      |  
|Total assets                                 |  | $                          | 151,172 |   |                        |   |            |      |      |                |  | $ | 118,432                |   |            |   |       |                |      |   |                        | $ | 94,906     |   |  |   |       |  |      |  
|                                             |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |       |                |      |   |                        |   |            |   |  |   |       |  |      |  
|                                             |  |                            |         |   |                        |   |            |      |     
|Interest-bearing liabilities:                |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |       |                |      |   |                        |   |            |   |  |   |       |  |      |  
|Demand deposits                              |  | $                          | 20,135  |   |                        | $ | 322        |      | 1.60 | %              |  | $ | 12,010                 |   |            | $ | 168   |                | 1.40 | % |                        | $ | 5,265      |   |  | $ | 49    |  | 0.93 | %
|Savings deposits                             |  |                            | 16,214  |   |                        |   | 214        |      | 1.32 | %              |  |   | 12,781                 |   |            |   | 167   |                | 1.30 | % |                        |   | 11,145     |   |  |   | 166   |  | 1.48 | %
|Time deposits                                |  |                            | 71,236  |   |                        |   | 1,590      |      | 2.23 | %              |  |   | 58,595                 |   |            |   | 1,427 |                | 2.45 | % |                        |   | 47,061     |   |  |   | 1,599 |  | 3.40 | %
|Fed funds sold/Repurchase agreements         |  |                            | 1,181   |   |                        |   | 8          |      | 0.71 | %              |  |   | 3,049                  |   |            |   | 24    |                | .79  | % |                        |   | 1,739      |   |  |   | 17    |  | 0.98 | %
|Short-term debt                              |  |                            | 550     |   |                        |   | 5          |      | 0.96 | %              |  |   | 1,439                  |   |            |   | 17    |                | 1.18 | % |                        |   | 1,972      |   |  |   | 47    |  | 2.38 | %
|Long-term debt                               |  |                            | 8,560   |   |                        |   | 294        |      | 3.43 | %              |  |   | 4,827                  |   |            |   | 162   |                | 3.35 | % |                        |   | 5,286      |   |  |   | 218   |  | 4.12 | %
|                                             |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |       |                |      |   |                        |   |            |   |  |   |       |  |      |  
|Total interest-bearing liabilities           |  |                            | 117,876 |   |                        |   | 2,433      |      |      |                |  |   | 92,701                 |   |            |   | 1,965 |                |      |   |                        |   | 72,468     |   |  |   | 2,096 |  |      |  
|                                             |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |       |                |      |   |                        |   |            |   |  |   |       |  |      |  
|Cost of average interest bearing liabilities |  |                            |         |   |                        |   |            |      | 2.06 | %              |  |   |                        |   |            |   |       |                | 2.13 | % |                        |   |            |   |  |   |       |  | 2.89 | %
|                                             |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |       |                |      |   |                        |   |            |   |  |   |       |  |      |  
|                                             |  |                            |         |   |                        |   |            |      |     
|Noninterest-bearing liabilities:             |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |       |                |      |   |                        |   |            |   |  |   |       |  |      |  
|Demand deposits                              |  |                            | 17,941  |   |                        |   |            |      |      |                |  |   | 14,211                 |   |            |   |       |                |      |   |                        |   | 12,104     |   |  |   |       |  |      |  
|Interest payable and other                   |  |                            | 1,122   |   |                        |   |            |      |      |                |  |   | 1,090                  |   |            |   |       |                |      |   |                        |   | 915        |   |  |   |       |  |      |  
|                                             |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |       |                |      |   |                        |   |            |   |  |   |       |  |      |  
|Total noninterest-bearing liabilities        |  |                            | 19,063  |   |                        |   |            |      |      |                |  |   | 15,301                 |   |            |   |       |                |      |   |                        |   | 13,019     |   |  |   |       |  |      |  
|                                             |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |       |                |      |   |                        |   |            |   |  |   |       |  |      |  
|Total liabilities                            |  |                            | 136,939 |   |                        |   |            |      |      |                |  |   | 108,002                |   |            |   |       |                |      |   |                        |   | 85,487     |   |  |   |       |  |      |  
|Minority interest                            |  |                            |        |   |                        |   |            |      |      |                |  |   | 121                    |   |            |   |       |                |      |   |                        |   | 582        |   |  |   |       |  |      |  
|Stockholders equity                         |  |                            | 14,233  |   |                        |   |            |      |      |                |  |   | 10,309                 |   |            |   |       |                |      |   |                        |   | 8,837      |   |  |   |       |  |      |  
|                                             |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |       |                |      |   |                        |   |            |   |  |   |       |  |      |  
|Total liabilities and stockholders equity   |  | $                          | 151,172 |   |                        |   |            |      |      |                |  | $ | 118,432                |   |            |   |       |                |      |   |                        | $ | 94,906     |   |  |   |       |  |      |  
|                                             |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |       |                |      |   |                        |   |            |   |  |   |       |  |      |  
|Net interest income                          |  |                            |         |   |                        | $ | 5,874      |      |      |                |  |   |                        |   |            | $ | 5,419 |                |      |   |                        |   |            |   |  | $ | 4,580 |  |      |  
|                                             |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |       |                |      |   |                        |   |            |   |  |   |       |  |      |  
|Net yield on interest-earning assets         |  |                            |         |   |                        |   |            |      | 4.04 | %              |  |   |                        |   |            |   |       |                | 4.75 | % |                        |   |            |   |  |   |       |  | 5.03 | %
|                                             |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |       |                |      |   |                        |   |            |   |  |   |       |  |      |  



40



---

Managements Discussion and Analysis



Table 2. Rate/Volume Variance Analysis (dollars in thousands)



|                               |  |                                |     |   |                       |   |      |                    |  |   |                                |   |  |              |      |   |                    |   |        |   |  |   |       |  
|------------------------------ |  | ------------------------------ | --- | - | --------------------- | - | ---- | ------------------ |  | - | ------------------------------ | - |  | ------------ | ---- | - | ------------------ | - | ------ | - |  | - | ----- | -
|                               |  | 2004 Compared to 2003          |     |   | 2003 Compared to 2002 |  
|                               |  | InterestIncome/ExpenseVariance |     |   | VarianceRate          |   |      | AttributedToVolume |  |   | InterestIncome/ExpenseVariance |   |  | VarianceRate |      |   | AttributedToVolume |  
|Interest-earning assets:       |  |                                |     |   |                       |   |      |                    |  |   |                                |   |  |              |      |   |                    |   |        |   |  |   |       |  
|Deposits in other banks        |  | $                              | 113 |   |                       | $ | 44   |                    |  | $ | 69                             |   |  | $            | (27  | ) |                    | $ | (15    | ) |  | $ | (12   | )
|Taxable investments securities |  |                                | (3  | ) |                       |   | (1   | )                  |  |   | (2                             | ) |  |              | (45  | ) |                    |   | (48    | ) |  |   | 3     |  
|Non taxable securities         |  |                                | (2  | ) |                       |   |     |                    |  |   | (2                             | ) |  |              | (1   | ) |                    |   |       |   |  |   | (1    | )
|Federal funds sold             |  |                                | 3   |   |                       |   |     |                    |  |   | 3                              |   |  |              | (1   | ) |                    |   |       |   |  |   | (1    | )
|Loans                          |  |                                | 813 |   |                       |   | (689 | )                  |  |   | 1,502                          |   |  |              | 782  |   |                    |   | (960   | ) |  |   | 1,742 |  
|                               |  |                                |     |   |                       |   |      |                    |  |   |                                |   |  |              |      |   |                    |   |        |   |  |   |       |  
|Total                          |  |                                | 924 |   |                       |   | (646 | )                  |  |   | 1,570                          |   |  |              | 708  |   |                    |   | (1,023 | ) |  |   | 1,731 |  
|                               |  |                                |     |   |                       |   |      |                    |  |   |                                |   |  |              |      |   |                    |   |        |   |  |   |       |  
|Interest-bearing liabilities:  |  |                                |     |   |                       |   |      |                    |  |   |                                |   |  |              |      |   |                    |   |        |   |  |   |       |  
|Demand deposits                |  |                                | 154 |   |                       |   | 20   |                    |  |   | 134                            |   |  |              | 119  |   |                    |   | 4      |   |  |   | 115   |  
|Savings deposits               |  |                                | 46  |   |                       |   | 1    |                    |  |   | 45                             |   |  |              | 2    |   |                    |   | (21    | ) |  |   | 23    |  
|Time deposits                  |  |                                | 164 |   |                       |   | (143 | )                  |  |   | 307                            |   |  |              | (173 | ) |                    |   | (502   | ) |  |   | 329   |  
|Federal funds purchased/       |  |                                |     |   |                       |   |      |                    |  |   |                                |   |  |              |      |   |                    |   |        |   |  |   |       |  
|Repurchase agreements          |  |                                | (15 | ) |                       |   | (2   | )                  |  |   | (13                            | ) |  |              | 7    |   |                    |   | (2     | ) |  |   | 9     |  
|Short-term debt                |  |                                | (12 | ) |                       |   | (5   | )                  |  |   | (7                             | ) |  |              | (29  | ) |                    |   | (9     | ) |  |   | (20   | )
|Long-term debt                 |  |                                | 132 |   |                       |   | 4    |                    |  |   | 128                            |   |  |              | (57  | ) |                    |   | (35    | ) |  |   | (22   | )
|                               |  |                                |     |   |                       |   |      |                    |  |   |                                |   |  |              |      |   |                    |   |        |   |  |   |       |  
|Total                          |  |                                | 469 |   |                       |   | (125 | )                  |  |   | 594                            |   |  |              | (131 | ) |                    |   | (565   | ) |  |   | 434   |  
|                               |  |                                |     |   |                       |   |      |                    |  |   |                                |   |  |              |      |   |                    |   |        |   |  |   |       |  
|Net interest income            |  | $                              | 455 |   |                       | $ | (521 | )                  |  | $ | 976                            |   |  | $            | 839  |   |                    | $ | (458   | ) |  | $ | 1,297 |  
|                               |  |                                |     |   |                       |   |      |                    |  |   |                                |   |  |              |      |   |                    |   |        |   |  |   |       |  



Net Interest Income



Net interest income is the Companys principal source of earnings. Net interest
income is the amount of income generated by earning assets (primarily loans and investment securities) less the interest expense incurred on interest-bearing liabilities (primarily deposits and FHLB Advances used to fund earning assets). Table 1
summarizes the major components of net interest income for the years ended December 31, 2004 and 2003 and 2002.



Compared to 2003, yields on interest-earning assets decreased during the year ended December 31, 2004 due to a decrease in loan yields. The cost of interest bearing
liabilities also decreased in 2003 primarily due to a change in deposit mix. The net yield on interest earning assets decreased from 4.75% to 4.04% during the year ended December 31, 2004.



Provision for Credit Losses



The allowance for credit losses is established to provide for expected losses in the
Banks loan portfolio. Loan losses and recoveries are charged or credited directly to the allowance. Management determines the provision for credit losses required to maintain an allowance adequate to provide for probable losses. Generally, the
factors considered in making this decision are the collectability of past due loans, volume of new loans, composition of the loan portfolio, and general economic outlook. However, due to the Banks short operating history, no trends have been
established to effectively estimate an allowance for credit losses. At this time management has decided to establish an allowance for loan losses equaling 1.75% of outstanding loans excluding mortgage loans and the guaranteed portion of United
States Government guaranteed loans. Mortgage loans are reserved at a rate of 1.0%. Specific reserves for individual loans were established in addition to the basic reserve as deemed necessary.



41



---

Managements Discussion and Analysis



Other Income



Noninterest income consists of revenues generated from a broad range of financial services and activities. The majority of noninterest income is a result of fees on
mortgage loans sold and service charges on deposit accounts including charges for insufficient funds, checks, and fees charged for nondeposit services. Table 3 discloses noninterest income for the periods ended December 31, 2004, 2003 and 2002.



Table 3. Sources of Noninterest Income



|                                                   |  |                                   |           |      |   |           |  |   |          
|-------------------------------------------------- |  | --------------------------------- | --------- | ---- | - | --------- |  | - | ---------
|                                                   |  | For the period ended December 31,
|                                                   |  | 2004                              |           | 2003 |   | 2002     
|Service charges on deposit accounts                |  | $                                 | 949,520   |      | $ | 805,609   |  | $ | 619,456  
|Fees on mortgage loans delivered to correspondents |  |                                   | 298,590   |      |   | 74,618    |  |   | 112,855  
|Other service charges and fees                     |  |                                   | 236,620   |      |   | 214,792   |  |   | 100,815  
|Other income                                       |  |                                   | 450,436   |      |   | 582,277   |  |   | 454,743  
|Gain and fees on the sale of loan servicing rights |  |                                   | 501,610   |      |   |          |  |   |         
|Gain on sale of mortgage loans                     |  |                                   |          |      |   | 411,289   |  |   | 182,735  
|                                                   |  |                                   |           |      |   |           |  |   |          
|                                                   |  | $                                 | 2,436,776 |      | $ | 2,088,585 |  | $ | 1,470,604
|                                                   |  |                                   |           |      |   |           |  |   |          



Activity in the deposit related
noninterest income accounts increased in 2004 as deposit customers increased. Due to the banks exit from mortgage loan servicing in April of 2004, higher fees were received on loans delivered to mortgage correspondents in 2004. The gain and
fees associated with the disposition of mortgage servicing rights in 2004 more than offset the profits from the sale of loans in the secondary market in 2003. Other income declined in 2004, due to decreased investment commissions in Surrey
Investment Services.



Other Expense



The major components of other expense for the periods ended December 31, 2004, 2003 and 2002
are as follows:



Table 4. Sources of Noninterest Expense



|                                                                                        |  |                                   |           |      |   |           |  |   |          
|--------------------------------------------------------------------------------------- |  | --------------------------------- | --------- | ---- | - | --------- |  | - | ---------
|                                                                                        |  | For the period ended December 31,
|                                                                                        |  | 2004                              |           | 2003 |   | 2002     
|Salary and benefits                                                                     |  | $                                 | 2,614,627 |      | $ | 2,329,385 |  | $ | 1,896,237
|Occupancy expenses                                                                      |  |                                   | 356,025   |      |   | 283,557   |  |   | 203,132  
|Furniture/equipment expenses                                                            |  |                                   | 405,603   |      |   | 434,493   |  |   | 328,762  
|Postage/printing and supplies                                                           |  |                                   | 239,798   |      |   | 307,131   |  |   | 209,847  
|Advertising and business promotion                                                      |  |                                   | 108,236   |      |   | 79,534    |  |   | 62,261   
|Professional fees                                                                       |  |                                   | 142,798   |      |   | 209,322   |  |   | 133,852  
|Lower of cost or market adjustment on loans available for sale transferred to portfolio |  |                                   |          |      |   | 213,581   |  |   |         
|Other expenses                                                                          |  |                                   | 1,291,261 |      |   | 1,252,724 |  |   | 769,598  
|                                                                                        |  |                                   |           |      |   |           |  |   |          
|                                                                                        |  | $                                 | 5,158,348 |      | $ | 5,109,727 |  | $ | 3,603,689
|                                                                                        |  |                                   |           |      |   |           |  |   |          



The overhead ratio of noninterest
expense to adjusted total revenue (net interest income plus noninterest income) decreased from 68.1% in 2003 to 62.1% for the year ended December 31, 2004. The decrease is attributable to the absorption of two branch openings in 2003 as well as
general balance sheet growth. Reduced cost associated with the mortgage lending operation also had a favorable effect on the efficiency ratio in 2004.



42



---

Managements Discussion and Analysis



Analysis of Financial Condition



Average earning assets have increased 27.7% from December 31, 2003 to December 31, 2004. Total earning assets represented 96.15% of total average assets at December 31,
2004 compared to 96.12% at the end of 2003. The mix of average earning assets changed moderately from December 31, 2003 to December 31, 2004. The most notable change in the mix of average earning assets was the increase in interest-bearing bank
balance. These balances increased for liquidity reasons and were partially funded by the participation of commercial loans.



Table 5. Average Asset Mix



|                               |  |                                     |             |   |                                     |        |    |                |   |             |   |  |        |   
|------------------------------ |  | ----------------------------------- | ----------- | - | ----------------------------------- | ------ | -- | -------------- | - | ----------- | - |  | ------ | --
|                               |  | For the Year EndedDecember 31, 2004 |             |   | For the Year EndedDecember 31, 2003 |       
|                               |  | AverageBalance                      |             |   | %                                   |        |    | AverageBalance |   |             | % | 
|Earning assets:                |  |                                     |             |   |                                     |        |    |                |   |             |   |  |        |   
|Loans, net                     |  | $                                   | 127,726,168 |   |                                     | 84.48  | %  |                | $ | 104,647,997 |   |  | 88.36  | % 
|Investment securities          |  |                                     | 3,821,470   |   |                                     | 2.53   | %  |                |   | 3,978,919   |   |  | 3.36   | % 
|Federal funds sold             |  |                                     | 191,344     |   |                                     | 0.13   | %  |                |   |            |   |  |       | % 
|Interest-bearing bank balances |  |                                     | 13,619,566  |   |                                     | 9.01   | %  |                |   | 5,205,369   |   |  | 4.40   | % 
|                               |  |                                     |             |   |                                     |        |    |                |   |             |   |  |        |   
|Total earning assets           |  |                                     | 145,358,548 |   |                                     | 96.15  | %  |                |   | 113,832,285 |   |  | 96.12  | % 
|                               |  |                                     |             |   |                                     |        |    |                |   |             |   |  |        |   
|                               |  |                                     |             |  
|Nonearning assets:             |  |                                     |             |   |                                     |        |    |                |   |             |   |  |        |   
|Cash and due from banks        |  |                                     | 1,780,244   |   |                                     | 1.18   | %  |                |   | 1,370,286   |   |  | 1.16   | % 
|Property and equipment         |  |                                     | 4,232,829   |   |                                     | 2.80   | %  |                |   | 3,884,532   |   |  | 3.28   | % 
|Other assets                   |  |                                     | 1,966,091   |   |                                     | 1.30   | %  |                |   | 1,347,002   |   |  | 1.13   | % 
|Allowance for loan losses      |  |                                     | (2,164,904  | ) |                                     | (1.43  | )% |                |   | (2,002,083  | ) |  | (1.69  | )%
|                               |  |                                     |             |   |                                     |        |    |                |   |             |   |  |        |   
|Total nonearning assets        |  |                                     | 5,814,260   |   |                                     | 3.85   | %  |                |   | 4,599,737   |   |  | 3.88   | % 
|                               |  |                                     |             |   |                                     |        |    |                |   |             |   |  |        |   
|Total assets                   |  | $                                   | 151,172,808 |   |                                     | 100.00 | %  |                | $ | 118,432,022 |   |  | 100.00 | % 
|                               |  |                                     |             |   |                                     |        |    |                |   |             |   |  |        |   



At December 31, 2004, average net
loans represented 84.48% of total average assets compared to 88.36% at the end of 2003. Investments decreased from 3.36% of average assets to 2.53% of average assets over the same time period. Interest-bearing bank balances increased over the period
from 4.40% to 9.01% of average assets. A higher percentage of average assets invested in lower yielding bank balances in 2004, coupled with a change in the mix of loans within the loan portfolio resulted in a decrease in the net yield on interest
earning assets as shown in Table 1.



Loans



Average net loans totaled $127,726,168 for the year ended December 31, 2004. This represents
an increase of 22.1% over the average net loans for 2003. Loan demand remained relatively strong in 2004.



The loan portfolio is dominated by real estate and commercial loans. These loans make up 93.8% of the total loan portfolio at December 31, 2004. This is up from the 93.5% that the two categories maintained at December
31, 2003. The amount of loans outstanding by type at December 31, 2004 and December 31, 2003 and the maturity distribution for variable and fixed rate loans as of December 31, 2004 are presented in Tables 6 & 7 respectively.



43



---

Managements Discussion and Analysis



Table 6. Loan Portfolio Summary (includes loans available for sale)



|                             |  |                   |             |   |                   |   |        |   |             |  |        |  
|---------------------------- |  | ----------------- | ----------- | - | ----------------- | - | ------ | - | ----------- |  | ------ | -
|                             |  | December 31, 2004 |             |   | December 31, 2003 |  
|                             |  | Amount            |             | % |                   |   | Amount |   | %           | 
|Construction and development |  | $                 | 3,093,423   |   | 2.29              | % |        | $ | 5,799,087   |  | 4.84   | %
|1-4 family residential       |  |                   | 40,005,007  |   | 29.56             | % |        |   | 38,499,158  |  | 32.15  | %
|Farmland                     |  |                   | 341,540     |   | 0.25              | % |        |   | 127,277     |  | 0.11   | %
|Nonfarm, nonresidential      |  |                   | 830,457     |   | 0.61              | % |        |   | 879,280     |  | 0.73   | %
|                             |  |                   |             |   |                   |   |        |   |             |  |        |  
|Total real estate            |  |                   | 44,270,427  |   | 32.71             | % |        |   | 45,304,802  |  | 37.83  | %
|                             |  |                   |             |  
|Agricultural                 |  |                   | 183,777     |   | 0.14              | % |        |   | 107,685     |  | 0.09   | %
|Commercial and industrial    |  |                   | 82,621,131  |   | 61.05             | % |        |   | 66,675,083  |  | 55.67  | %
|Consumer                     |  |                   | 8,034,675   |   | 5.94              | % |        |   | 7,595,515   |  | 6.34   | %
|Other                        |  |                   | 223,200     |   | 0.16              | % |        |   | 78,178      |  | 0.07   | %
|                             |  |                   |             |   |                   |   |        |   |             |  |        |  
|Total                        |  | $                 | 135,333,210 |   | 100.00            | % |        | $ | 119,761,263 |  | 100.00 | %
|                             |  |                   |             |   |                   |   |        |   |             |  |        |  



Table 7. Maturity Schedule of Loans



|                                   |  |                                     |            |             |        |            |   |       |           |  |   |             |  |        |  
|---------------------------------- |  | ----------------------------------- | ---------- | ----------- | ------ | ---------- | - | ----- | --------- |  | - | ----------- |  | ------ | -
|                                   |  | CommercialFinancial andAgricultural |            | Real Estate |        | Others     |   | Total |          
|                                   |  |                                     |            |             | Amount |            | % |      
|Fixed rate loans:                  |  |                                     |            |             |        |            |   |       |           |  |   |             |  |        |  
|Three months or less               |  | $                                   | 1,034,675  |             | $      | 666,028    |   | $     | 1,956,428 |  | $ | 3,657,131   |  | 2.70   | %
|Over three months to twelve months |  |                                     | 2,436,589  |             |        | 1,206,049  |   |       | 1,571,818 |  |   | 5,214,456   |  | 3.85   | %
|Over one year to five years        |  |                                     | 15,500,996 |             |        | 8,784,079  |   |       | 3,762,613 |  |   | 28,047,688  |  | 20.73  | %
|Over five years                    |  |                                     | 3,155,418  |             |        | 15,265,059 |   |       | 14,565    |  |   | 18,435,042  |  | 13.62  | %
|                                   |  |                                     |            |             |        |            |   |       |           |  |   |             |  |        |  
|Total fixed rate loans             |  | $                                   | 22,127,678 |             | $      | 25,921,215 |   | $     | 7,305,424 |  | $ | 55,354,317  |  | 40.90  | %
|                                   |  |                                     |            |             |        |            |   |       |           |  |   |             |  |        |  
|                                   |  |                                     |            |             |       
|Variable rate loans:               |  |                                     |            |             |        |            |   |       |           |  |   |             |  |        |  
|Three months or less               |  | $                                   | 60,011,500 |             | $      | 18,349,212 |   | $     | 720,767   |  | $ | 79,081,479  |  | 58.44  | %
|Over three months to twelve months |  |                                     |           |             |        |           |   |       | 14,245    |  |   | 14,245      |  | 0.01   | %
|Over one year to five years        |  |                                     | 665,730    |             |        |           |   |       | 217,439   |  |   | 883,169     |  | 0.65   | %
|Over five years                    |  |                                     |           |             |        |           |   |       |          |  |   |            |  |       |  
|                                   |  |                                     |            |             |        |            |   |       |           |  |   |             |  |        |  
|Total variable rate loans          |  | $                                   | 60,677,230 |             | $      | 18,349,212 |   | $     | 952,451   |  | $ | 79,978,893  |  | 59.10  | %
|                                   |  |                                     |            |             |        |            |   |       |           |  |   |             |  |        |  
|                                   |  |                                     |            |             |       
|Total loans:                       |  |                                     |            |             |        |            |   |       |           |  |   |             |  |        |  
|Three months or less               |  | $                                   | 61,046,175 |             | $      | 19,015,240 |   | $     | 2,677,195 |  | $ | 82,738,610  |  | 61.14  | %
|Over three months to twelve months |  |                                     | 2,436,589  |             |        | 1,206,049  |   |       | 1,586,063 |  |   | 5,228,701   |  | 3.86   | %
|Over one year to five years        |  |                                     | 16,166,726 |             |        | 8,784,079  |   |       | 3,980,052 |  |   | 28,930,857  |  | 21.38  | %
|Over five years                    |  |                                     | 3,155,418  |             |        | 15,265,059 |   |       | 14,565    |  |   | 18,435,042  |  | 13.62  | %
|                                   |  |                                     |            |             |        |            |   |       |           |  |   |             |  |        |  
|Total loans                        |  | $                                   | 82,804,908 |             | $      | 44,270,427 |   | $     | 8,257,875 |  | $ | 135,333,210 |  | 100.00 | %
|                                   |  |                                     |            |             |        |            |   |       |           |  |   |             |  |        |  



44



---

Managements Discussion and Analysis



Interest rates charged on loans vary with the degree of risk, maturity and amount of the loan. Competitive pressures, money market rates,
availability of funds, and government regulation also influence interest rates. On average, loans yielded 6.33% for the year ended December 31, 2004 compared to an average yield of 6.95% in 2003. Though general interest rates increased in 2004, much
of the increases occurred in the second half of 2004. The production and renewal of loans in a period of historically low interest rates contributed to this decrease. Additionally, a change in loan mix and competitive pressures continued to tighten
margins. Higher yielding consumer loans decreased from 6.34% of total loans at December 31, 2003 to 5.94% of total loans at December 31, 2004. Much of this decrease was due to a reduction in the sales finance loans in the finance company subsidiary.



Investment Securities



The Company uses its investment portfolio to provide for unexpected deposit decreases or
loan generation, to meet the Companys interest rate sensitivity goals, and to generate income.



Management of the investment portfolio has been conservative with virtually all investments taking the form of purchases of U.S. Government Agencies and Mortgage-backed Securities. Management views the investment
portfolio as a source of income, and purchases securities with that in mind. However, adjustments are necessary in the portfolio to provide an adequate source of liquidity, which can be used to meet funding requirements for loan demand and deposit
fluctuations and to control interest rate risk. Therefore, from time to time management may sell certain securities prior to their maturity. Table 8 presents the investment portfolio at December 31, 2004 by major type of investments and maturity
ranges.



The general turnover of U.S. Government Agencies and the investment in
adjustable-rate Mortgage-backed Securities, which adjust annually, caused the average yield of the investment portfolio to increase to 2.65% for the year ended December 31, 2004 compared to 2.01% for 2003. At December 31, 2004, the market value of
the investment portfolio was $3,482,811, representing a $20,161 depreciation of book value. At December 31, 2003 the market value of the investment portfolio was $5,249 above book value.



Table 8. Investment Securities



December 31, 2004, Available for Sale and Restricted



|                                     |  |                    |           |   |                           |   |           |                            |  |                |   |  |       |         |   |             |   |           |   |  |   |          
|------------------------------------ |  | ------------------ | --------- | - | ------------------------- | - | --------- | -------------------------- |  | -------------- | - |  | ----- | ------- | - | ----------- | - | --------- | - |  | - | ---------
|                                     |  | In One Yearor Less |           |   | One YearThrough FiveYears |   |           | After FiveThrough TenYears |  | After TenYears |   |  | Total |         |   | MarketValue
|Investment securities:               |  |                    |           |   |                           |   |           |                            |  |                |   |  |       |         |   |             |   |           |   |  |   |          
|U.S. Government agencies             |  | $                  | 997,936   |   |                           | $ | 1,499,744 |                            |  | $              |  |  | $     |        |   |             | $ | 2,497,680 |   |  | $ | 2,475,850
|U.S. Government agencies pools (MBS) |  |                    |          |   |                           |   |          |                            |  |                |  |  |       | 214,632 |   |             |   | 214,632   |   |  |   | 216,301  
|Municipal securities                 |  |                    |          |   |                           |   |          |                            |  |                |  |  |       |        |   |             |   |          |   |  |   |         
|Restricted                           |  |                    | 790,660   |   |                           |   |          |                            |  |                |  |  |       |        |   |             |   | 790,660   |   |  |   | 790,660  
|                                     |  |                    |           |   |                           |   |           |                            |  |                |   |  |       |         |   |             |   |           |   |  |   |          
|Total                                |  | $                  | 1,788,596 |   |                           | $ | 1,499,744 |                            |  | $              |  |  | $     | 214,632 |   |             | $ | 3,502,972 |   |  | $ | 3,482,811
|                                     |  |                    |           |   |                           |   |           |                            |  |                |   |  |       |         |   |             |   |           |   |  |   |          
|Weighted average yields:             |  |                    |           |   |                           |   |           |                            |  |                |   |  |       |         |   |             |   |           |   |  |   |          
|U.S. Government agencies             |  |                    | 2.03      | % |                           |   | 2.35      | %                          |  |                |  |  |       |        |   |             |   | 2.22      | % |  |   |          
|U.S. Government agencies pools (MBS) |  |                    |          |   |                           |   |          |                            |  |                |  |  |       | 3.57    | % |             |   | 3.57      | % |  |   |          
|Municipal securities                 |  |                    |          |   |                           |   |          |                            |  |                |  |  |       |        |   |             |   |          |   |  |   |          
|Restricted                           |  |                    | 3.75      | % |                           |   |          |                            |  |                |  |  |       |        |   |             |   | 3.75      | % |  |   |          
|                                     |  |                    |           |   |                           |   |           |                            |  |                |   |  |       |         |   |             |   |           |   |  |   |          
|Consolidated                         |  |                    | 2.79      | % |                           |   | 2.35      | %                          |  |                |  |  |       | 3.57    | % |             |   | 2.65      | % |  |   |          
|                                     |  |                    |           |   |                           |   |           |                            |  |                |   |  |       |         |   |             |   |           |   |  |   |          



(continued)



45



---

Managements Discussion and Analysis



Table 8. Investment Securities, continued



December 31, 2003, Available for Sale and Restricted



|                                     |  |                    |           |   |                           |   |         |                            |  |   |                |   |  |       |         |   |             |   |           |   |  |   |          
|------------------------------------ |  | ------------------ | --------- | - | ------------------------- | - | ------- | -------------------------- |  | - | -------------- | - |  | ----- | ------- | - | ----------- | - | --------- | - |  | - | ---------
|                                     |  | In One Yearor Less |           |   | One YearThrough FiveYears |   |         | After FiveThrough TenYears |  |   | After TenYears |   |  | Total |         |   | MarketValue
|Investment securities:               |  |                    |           |   |                           |   |         |                            |  |   |                |   |  |       |         |   |             |   |           |   |  |   |          
|U.S. Government agencies             |  | $                  | 3,999,544 |   |                           | $ | 999,380 |                            |  | $ |               |   |  | $     |        |   |             | $ | 4,998,924 |   |  | $ | 4,998,950
|U.S. Government agencies pools (MBS) |  |                    |          |   |                           |   |        |                            |  |   |               |   |  |       | 321,673 |   |             |   | 321,673   |   |  |   | 326,635  
|Municipal securities                 |  |                    | 100,127   |   |                           |   |        |                            |  |   |               |   |  |       |        |   |             |   | 100,127   |   |  |   | 100,388  
|Restricted                           |  |                    | 445,000   |   |                           |   |        |                            |  |   |               |   |  |       |        |   |             |   | 445,000   |   |  |   | 445,000  
|                                     |  |                    |           |   |                           |   |         |                            |  |   |                |   |  |       |         |   |             |   |           |   |  |   |          
|Total                                |  | $                  | 4,544,671 |   |                           | $ | 999,380 |                            |  | $ |               |   |  | $     | 321,673 |   |             | $ | 5,865,724 |   |  | $ | 5,870,973
|                                     |  |                    |           |   |                           |   |         |                            |  |   |                |   |  |       |         |   |             |   |           |   |  |   |          
|Weighted average yields:             |  |                    |           |   |                           |   |         |                            |  |   |                |   |  |       |         |   |             |   |           |   |  |   |          
|U.S. Government agencies             |  |                    | 1.50      | % |                           |   | 2.53    | %                          |  |   |               | % |  |       |        | % |             |   | 1.71      | % |  |   |          
|U.S. Government agencies pools (MBS) |  |                    |          | % |                           |   |        | %                          |  |   |               | % |  |       | 4.47    | % |             |   | 4.47      | % |  |   |          
|Municipal securities                 |  |                    | 2.70      | % |                           |   |        | %                          |  |   |               | % |  |       |        | % |             |   | 2.70      | % |  |   |          
|Restricted                           |  |                    | 3.50      | % |                           |   |        | %                          |  |   |               | % |  |       |        | % |             |   | 3.50      | % |  |   |          
|                                     |  |                    |           |   |                           |   |         |                            |  |   |                |   |  |       |         |   |             |   |           |   |  |   |          
|Consolidated                         |  |                    | 1.72      | % |                           |   | 2.53    | %                          |  |   |               | % |  |       | 4.47    | % |             |   | 2.01      | % |  |   |          
|                                     |  |                    |           |   |                           |   |         |                            |  |   |                |   |  |       |         |   |             |   |           |   |  |   |          



Average federal funds sold totaled
$191,344 for the year ended December 31, 2004, which was up over the 2003 average. Federal funds represent the most liquid portion of the Banks invested funds and generally the lowest yielding portion of earning assets. Deposits in other banks
primarily represent deposits at the Federal Home Loan Bank of Atlanta, which pays an overnight rate on those deposits. This rate usually mirrors the federal funds rate. Management has made an effort to maintain these funds at the lowest level
possible consistent with prudent risk management strategies, while having available resources to fund loan demand and the maturity of time deposits. Our exit from the mortgage loan servicing market improved the banks liquidity position given
we were not having to fund mortgage loans for later sale. Larger average demand deposit balances also made it necessary to retain funds in more liquid investments. During the year ended December 31, 2004, average federal funds and deposits in other
banks represented 0.13% and 9.01% of average earning assets, respectively. This compares to 0.0% and 4.40% in 2003, respectively.



Deposits



The Bank relies on deposits generated in its market area to provide the majority of funds needed to support lending activities and for investment in liquid assets. More specifically, core deposits (total deposits less
certificates of deposit in denominations of $100,000 or more) are the primary funding source. The Banks balance sheet growth is largely determined by the availability of deposits in its markets, the cost of attracting the deposits, and the
prospects of profitably utilizing the available deposits by increasing loans or investment portfolios. Market conditions have resulted in depositors shopping for deposit rates more than in the past. An increased customer awareness of interest rates
adds to the importance of rate management. The Banks management must continually monitor market pricing, competitors rates, and internal interest rate spreads to maintain the Banks growth and profitability. The Bank attempts to
structure rates so as to promote deposit and asset growth, while at the same time, increasing overall profitability of the Bank.



46



---

Managements Discussion and Analysis



Average deposits for the year ended December 31, 2004 amounted to $126,511,211, which was an increase of $27,442,710, or 27.7% over 2003.
Average core deposits totaled $106,003,321 for the year ended December 31, 2004, an increase of $26,979,113, or 34.1% over 2003. The percentage of the Banks average deposits that are interest bearing increased to 85.83% for the year ended
December 31, 2004 from 85.66% in 2003. Average demand deposits, which earn no interest, increased 26.2% from $14,211,139 in 2003 to $17,941,460 in 2004. Average deposits for the periods ended December 31, 2004 and December 31, 2003 are summarized in
Table 9 below:



Table 9. Deposit Mix



|                                |  |                   |             |   |                   |   |                |   |            |  |        |  
|------------------------------- |  | ----------------- | ----------- | - | ----------------- | - | -------------- | - | ---------- |  | ------ | -
|                                |  | December 31, 2004 |             |   | December 31, 2003 |  
|                                |  | AverageBalance    |             | % |                   |   | AverageBalance |   | %          | 
|Interest-bearing deposits:      |  |                   |             |   |                   |   |                |   |            |  |        |  
|NOW Accounts                    |  | $                 | 20,134,936  |   | 15.92             | % |                | $ | 12,010,221 |  | 12.12  | %
|Money Market                    |  |                   | 11,953,082  |   | 9.45              | % |                |   | 8,919,936  |  | 9.00   | %
|Savings                         |  |                   | 4,260,542   |   | 3.37              | % |                |   | 3,860,766  |  | 3.90   | %
|Small denomination certificates |  |                   | 50,727,695  |   | 40.10             | % |                |   | 38,550,484 |  | 38.91  | %
|Large denomination certificates |  |                   | 20,507,890  |   | 16.21             | % |                |   | 20,044,293 |  | 20.23  | %
|Repurchase agreements           |  |                   | 985,606     |   | 0.78              | % |                |   | 1,471,662  |  | 1.50   | %
|                                |  |                   |             |   |                   |   |                |   |            |  |        |  
|Total interest-bearing deposits |  |                   | 108,569,751 |   | 85.83             | % |                |   | 84,857,362 |  | 85.66  | %
|Noninterest-bearing deposits    |  |                   | 17,941,460  |   | 14.17             | % |                |   | 14,211,139 |  | 14.34  | %
|                                |  |                   |             |   |                   |   |                |   |            |  |        |  
|Total deposits                  |  | $                 | 126,511,211 |   | 100.00            | % |                | $ | 99,068,501 |  | 100.00 | %
|                                |  |                   |             |   |                   |   |                |   |            |  |        |  



The average balance of certificates of
deposit issued in denominations of $100,000 or more increased by $463,597, or 2.3% for the year ended December 31, 2004. The strategy of management has been to support loan and investment growth with core deposits and not to aggressively solicit the
more volatile, large denomination certificates of deposit. Table 10 provides maturity information relating to certificates of deposit of $100,000 or more at December 31, 2004.



Table 10. Large Time Deposit Maturities



|                                                                    |  |   |           
|------------------------------------------------------------------- |  | - | ----------
|Analysis of time deposits of $100,000 or more at December 31, 2004: |  |   |           
|Remaining maturity of three months or less                          |  | $ | 4,844,491 
|Remaining maturity over three through twelve months                 |  |   | 11,059,984
|Remaining maturity over twelve months                               |  |   | 5,394,906 
|                                                                    |  |   |           
|Total time deposits of $100,000 or more                             |  | $ | 21,299,381
|                                                                    |  |   |           



Borrowings



From time to time the Bank will find that funds raised through deposits and repurchase
agreements will not fully satisfy the Banks liquidity needs. When this occurs the Bank uses borrowings from correspondent banks and the Federal Home Loan Bank (FHLB) to fund the shortfall. At year-end 2004, the Bank had no short-term
borrowings. The average interest rate paid for federal funds purchased and short-term debt for the year ended December 31, 2004, were 0.71% and 0.96%, respectively. Long-term debt consist of long term, fixed rate advances from the FHLB, a revolving
line of credit with a commercial bank, proceeds of which are to fund the purchase of sales finance contracts by Friendly Finance, LLC, and a mortgage loan. The rate on the Friendly Finance, LLC debt is tied to the prime rate. The average interest
rate paid on long- term debt for the year ended December 31, 2004, was 3.43%.



Capital Adequacy



Stockholders equity amounted to
$15,045,421 at December 31, 2004, a 15.1% increase over the 2003 year-end total of $13,073,466. Average stockholders equity as a percentage of average total assets amounted to 9.42% for the year ended December 31, 2004 and 8.70% in 2003.



47



---

Managements Discussion and Analysis



Regulatory guidelines relating to capital adequacy provide minimum risk-based ratios which assess capital adequacy while encompassing all
credit risks, including those related to off-balance sheet activities. Capital ratios under these guidelines are computed by weighing the relative risk of each asset category to derive risk-adjusted assets. The risk-based capital guidelines require
minimum ratios of core (Tier 1) capital (common stockholders equity) to risk-weighted assets of 4.0% and total regulatory capital (core capital plus allowance for loan losses up to 1.25% of risk-weighted assets) to risk-weighted assets of
8.0%. As of December 31, 2004 the Bank has a ratio of Tier 1 capital to risk-weighted assets of 9.26% and a ratio of total capital to risk-weighted assets of 10.52%. All capital ratio levels indicate that the Bank is well capitalized.



At December 31, 2004 the Company had 1,211,008 shares of common stock outstanding, which were
held by approximately 1,650 stockholders of record. Stock options for 40,819 shares of common stock were exercised in 2004.



Nonperforming and Problem Assets



Certain credit risks are inherent in making loans, particularly commercial and consumer loans. Management prudently assesses these risks and attempts to manage them
effectively. The Bank also attempts to reduce repayment risks by adhering to internal credit policies and procedures. These policies and procedures include officer and customer limits, periodic loan documentation review and follow up on exceptions
to credit policies.



Nonperforming assets at December 31, 2004 and 2003
are analyzed in Table 11.



Table 11. Nonperforming Assets



|                        |  |      |           |      |   |        
|----------------------- |  | ---- | --------- | ---- | - | -------
|                        |  | 2004 |           | 2003
|Nonaccrual loans        |  | $    | 1,259,449 |      | $ | 236,457
|Other real estate owned |  |      |          |      |   |       
|                        |  |      |           |      |   |        
|                        |  | $    | 1,259,449 |      | $ | 236,457
|                        |  |      |           |      |   |        



Nonaccrual loans were 0.93% and 0.20%
of outstanding loans at December 31, 2004 and 2003, respectively. The Bank had no other real estate owned at December 31, 2004 or 2003.



Credit Losses



The allowance for loan losses is maintained at a level adequate to absorb probable losses. Some of the factors which management considers in determining the appropriate level of the allowance for credit losses are:
past loss experience, an evaluation of the current loan portfolio, identified loan problems, the loan volume outstanding, the present and expected economic conditions in general, and in particular, how such conditions relate to the market area that
the Bank serves. Bank regulators also periodically review the Banks loans and other assets to assess their quality. Loans deemed uncollectible are charged to the allowance. Provisions for loan losses and recoveries on loans previously charged
off are added to the allowance.



Net loans charged off as a percentage of
average loans were 0.110% and 0.095% in 2004 and 2003 respectively.



The
provision for loan losses and the activity in the allowance for credit losses are detailed in Table 12.



Table 12. Credit Losses



|                                       |  |      |           |   |      |   |           |  
|-------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | -
|                                       |  | 2004 |           |   | 2003 |  
|Allowance for credit losses, beginning |  | $    | 2,109,820 |   |      | $ | 1,831,167 |  
|Provision for credit losses, added     |  |      | 325,032   |   |      |   | 378,401   |  
|Net charge-offs                        |  |      | (140,721  | ) |      |   | (99,748   | )
|                                       |  |      |           |   |      |   |           |  
|Allowance for credit losses, ending    |  | $    | 2,294,131 |   |      | $ | 2,109,820 |  
|                                       |  |      |           |   |      |   |           |  



48



---

Managements Discussion and Analysis



Liquidity and Sensitivity



The principal goals of the Banks asset and liability management strategy are the maintenance of adequate liquidity and the management of interest rate risk.
Liquidity is the ability to convert assets to cash in order to fund depositors withdrawals or borrowers loans without significant loss. Interest rate risk management balances the effects of interest rate changes on assets that earn
interest or liabilities on which interest is paid, to protect the Bank from wide fluctuations in its net interest income which could result from interest rate changes.



Management must insure that adequate funds are available at all times to meet the needs of its customers. On the asset side of the balance
sheet, maturing investments, loan payments, maturing loans, federal funds sold, and unpledged investment securities are principal sources of liquidity. On the liability side of the balance sheet, liquidity sources include core deposits, the ability
to increase large denomination certificates, federal fund lines from correspondent banks, borrowings from the Federal Reserve Bank, as well as the ability to generate funds through the issuance of long-term debt and equity.



The liquidity ratio (the level of liquid assets divided by total deposits plus short-term
liabilities) was 13.24% at December 31, 2004, compared to 9.86% at December 31, 2003. The liquidity ratio at December 31, 2004 is considered adequate by management.



Interest rate risk is the effect that changes in interest rates would have on interest income and interest expense as interest-sensitive
assets and interest-sensitive liabilities either reprice or mature. Management attempts to maintain the portfolios of interest-earning assets and interest-bearing liabilities with maturities or repricing opportunities at levels that will afford
protection from erosion of net interest margin, to the extent practical, from changes in interest rates. Table 13 shows the sensitivity of the Banks balance sheet as of that specific date and is not necessarily indicative of the position on
other dates. At December 31, 2004, the Bank appeared to be cumulatively asset-sensitive (earning assets subject to interest rate changes exceeding interest-bearing liabilities subject to changes in interest rates). However, in the one-year window
liabilities subject to change in interest rates exceed assets subject to interest rate changes (non-asset sensitive).



Matching sensitive positions alone does not ensure the Bank has no interest rate risk. The repricing characteristics of assets are different from the repricing
characteristics of funding sources. Thus, net interest income can be impacted by changes in interest rates even if the repricing opportunities of assets and liabilities are perfectly matched.



49



---

Managements Discussion and Analysis



Table 13. Interest Rate Sensitivity



|                                                              |  |                              |            |   |               |   |             |               |  |   |               |   |  |       |            |   |  |   |             |  
|------------------------------------------------------------- |  | ---------------------------- | ---------- | - | ------------- | - | ----------- | ------------- |  | - | ------------- | - |  | ----- | ---------- | - |  | - | ----------- | -
|                                                              |  | December 31, 2004 Maturities |           
|                                                              |  | 1 - 3 Months                 |            |   | 4 - 12 Months |   |             | 13 - 60Months |  |   | Over 60Months |   |  | Total |           
|Earning Assets:                                               |  |                              |            |   |               |   |             |               |  |   |               |   |  |       |            |   |  |   |             |  
|Loans                                                         |  | $                            | 82,408,450 |   |               | $ | 1,857,875   |               |  | $ | 28,159,123    |   |  | $     | 22,907,762 |   |  | $ | 135,333,210 |  
|Investments                                                   |  |                              | 997,936    |   |               |   |            |               |  |   | 1,499,744     |   |  |       | 214,632    |   |  |   | 2,712,312   |  
|Interest-bearing balances with banks                          |  |                              | 12,759,356 |   |               |   |            |               |  |   |              |   |  |       |           |   |  |   | 12,759,356  |  
|Federal funds sold                                            |  |                              | 301,000    |   |               |   |            |               |  |   |              |   |  |       |           |   |  |   | 301,000     |  
|                                                              |  |                              |            |   |               |   |             |               |  |   |               |   |  |       |            |   |  |   |             |  
|Total                                                         |  | $                            | 96,466,742 |   |               | $ | 1,857,875   |               |  | $ | 29,658,867    |   |  | $     | 23,122,394 |   |  | $ | 151,105,878 |  
|                                                              |  |                              |            |   |               |   |             |               |  |   |               |   |  |       |            |   |  |   |             |  
|Interest-bearing deposits:                                    |  |                              |            |   |               |   |             |               |  |   |               |   |  |       |            |   |  |   |             |  
|NOW accounts                                                  |  | $                            | 21,333,934 |   |               | $ |            |               |  | $ |              |   |  | $     |           |   |  | $ | 21,333,934  |  
|Money market                                                  |  |                              | 14,882,824 |   |               |   |            |               |  |   |              |   |  |       |           |   |  |   | 14,882,824  |  
|Savings                                                       |  |                              | 4,569,376  |   |               |   |            |               |  |   |              |   |  |       |           |   |  |   | 4,569,376   |  
|Certificates of deposit                                       |  |                              | 16,324,179 |   |               |   | 37,212,346  |               |  |   | 14,429,712    |   |  |       |           |   |  |   | 67,966,237  |  
|Repurchase agreements/fed funds purchased                     |  |                              | 3,447,823  |   |               |   |            |               |  |   |              |   |  |       |           |   |  |   | 3,447,823   |  
|Short-term debt                                               |  |                              |           |   |               |   |            |               |  |   |              |   |  |       |           |   |  |   |            |  
|Long-term debt                                                |  |                              | 1,001,074  |   |               |   | 1,503,353   |               |  |   | 1,509,539     |   |  |       | 7,284,986  |   |  |   | 11,298,952  |  
|                                                              |  |                              |            |   |               |   |             |               |  |   |               |   |  |       |            |   |  |   |             |  
|Total                                                         |  | $                            | 61,559,210 |   |               | $ | 38,715,699  |               |  | $ | 15,939,251    |   |  | $     | 7,284,986  |   |  | $ | 123,499,146 |  
|                                                              |  |                              |            |   |               |   |             |               |  |   |               |   |  |       |            |   |  |   |             |  
|Interest sensitivity gap                                      |  | $                            | 34,907,532 |   |               | $ | (36,857,824 | )             |  | $ | 13,719,616    |   |  | $     | 15,837,408 |   |  | $ |            |  
|Cumulative interest sensitivity gap                           |  | $                            | 34,907,532 |   |               | $ | (1,950,292  | )             |  | $ | 11,769,324    |   |  | $     | 27,606,732 |   |  | $ | 27,606,732  |  
|Ratio of sensitive assets to sensitive liabilities            |  |                              | 156.71     | % |               |   | 4.80        | %             |  |   | 186.07        | % |  |       | 317.40     | % |  |   | 122.35      | %
|Cumulative ratio of sensitive assets to sensitive liabilities |  |                              | 156.71     | % |               |   | 98.06       | %             |  |   | 110.13        | % |  |       | 122.35     | % |  |   | 122.35      | %



Table 14. Key Financial Ratios



|                                 |  |                  |   |  |                  |  
|-------------------------------- |  | ---------------- | - |  | ---------------- | -
|                                 |  | December 31,2004 |   |  | December 31,2003 |  
|Return on average assets         |  | 1.21             | % |  | 1.06             | %
|Return on average equity         |  | 12.85            | % |  | 12.23            | %
|Average equity to average assets |  | 9.42             | % |  | 8.70             | %



50



---

Board of Directors and Officers



Board of Directors



|                           |  |               |  |                                         
|-------------------------- |  | ------------- |  | ----------------------------------------
|Edward C. Ted Ashby, III |  |               |  | Surrey Bank & Trust                     
|                           |  |              
|William A. Bill Johnson  |  |               |  | J. G. Coram Company, Inc.               
|                           |  |              
|Elizabeth Johnson Lovill   |  |               |  | Town & Country Builders                 
|                           |  |              
|Robert H. Moody            |  |               |  | Moody Funeral Services                  
|                           |  |              
|Gene Rees                  |  |               |  | F. Rees Clothing                        
|                           |  |              
|Tom G. Webb                |  |               |  | Araneum, LLC                            
|                           |  |              
|Buddy Williams             |  |               |  | Williams & Birkett, LLC                 
|                           |  |              
|Hylton Wright              |  |               |  | Retired                                 
|                           |  |              
|                           |  | Bank Officers |  |                                         
|                           |  |              
|Hylton Wright              |  |               |  | Chairman                                
|                           |  |              
|Edward C. Ted Ashby, III |  |               |  | President and CEO                       
|                           |  |              
|Peter A. Pequeno           |  |               |  | Senior Vice President and CLO           
|                           |  |              
|Mark H. Towe               |  |               |  | Senior Vice President, Treasurer and CFO
|                           |  |              
|Brenda J. Harding          |  |               |  | Senior Vice President, Secretary and COO
|                           |  |              
|Christopher Nichols        |  |               |  | Vice President                          
|                           |  |              
|Lonnie Dillon              |  |               |  | Vice President                          
|                           |  |              
|Kenneth Shelton            |  |               |  | Vice President                          



51



---

Stockholder Information



Annual Meeting



The annual meeting of stockholders will be held Friday, April 29, 2005 at 10:00 a.m. at Cross Creek Country Club, 1129 Greenhill Road, Mount Airy, North Carolina.



Requests for Information



Requests for information should be directed to Mr. Mark H. Towe, Senior Vice President and
CFO, at Surrey Bank & Trust, Post Office Box 1227, Mount Airy, North Carolina, 27030; telephone (336) 783-3900. A copy of the Banks Form 10-KSB for 2004 will be furnished, without charge, after March 31, 2005 upon written request.



|                             |  |                              
|---------------------------- |  | -----------------------------
|Independent Auditors         |  | Stock Transfer Agent         
|                             | 
|Larrowe & Company, PLC       |  | First Citizens Bank          
|Certified Public Accountants |  | & Trust Company              
|Post Office Box 760          |  | Post Office Box 29522        
|Galax, Virginia 24333        |  | Raleigh, North Carolina 27626



Federal Deposit Insurance
Corporation



The Bank is a member of the FDIC. This statement has
not been reviewed, or confirmed for accuracy or relevance by the Federal Deposit Insurance Corporation.



Banking Offices



|                           |  |                            |  |                               
|-------------------------- |  | -------------------------- |  | ------------------------------
|145 North Renfro Street    |  | 1280 West Pine Street      |  | 303 South Main Street         
|Mount Airy, North Carolina |  | Mount Airy, North Carolina |  | Stuart Virginia               
|(336) 783-3900             |  | (336) 783-3920             |  | (276) 694-4825                
|                           |  |                           
|2050 Rockford Street       |  |                            |  | 108 Heatherly Creek Drive     
|Mount Airy, North Carolina |  |                            |  | Pilot Mountain, North Carolina
|(336) 783-3940             |  |                            |  | (336) 368-1122                
|                           |  |                           
|Friendly Finance, LLC      |  | Mortgage Lending Office    |  | SB & T Insurance              
|                           |  |                           
|165 North Renfro Street    |  | 199 North Renfro Street    |  | 199 North Renfro Street       
|Mount Airy, North Carolina |  | Mount Airy, North Carolina |  | Mount Airy, North Carolina    
|(336) 783-3980             |  | (336) 783-3933             |  | (336) 783-3939                



52