Exhibit 15.1





2008 Annual Report





|                                                           |  |   
|---------------------------------------------------------- |  | --
|Table of Contents                                          |  |   
|                                                           | 
|Letter to Stockholders                                     |  | 1 
|                                                           | 
|Financial Highlights Summary                               |  | 2 
|                                                           | 
|Consolidated Balance Sheets                                |  | 3 
|                                                           | 
|Consolidated Statements of Income                          |  | 4 
|                                                           | 
|Consolidated Statements of Changes in Stockholders Equity |  | 5 
|                                                           | 
|Consolidated Statements of Cash Flows                      |  | 7 
|                                                           | 
|Notes to Consolidated Financial Statements                 |  | 9 
|                                                           | 
|Report of Independent Registered Public Accounting Firm    |  | 40
|                                                           | 
|Managements Discussion and Analysis                       |  | 41
|                                                           | 
|Board of Directors and Officers                            |  | 54
|                                                           | 
|Stockholder Information                                    |  | 55



---

Dear Shareholder:

Despite a
tumultuous year for the financial industry in general, Surrey Bancorp (the Company) remained profitable in 2008. Although the Company did not enjoy the same level of success that we have experienced in the past, I am pleased with our
performance relative to other companies in the financial industry. In a year marked by drastic reductions in interest rates, the failure of several large financial institutions and an abrupt decline in economic activity, our traditional approach to
banking allowed us to avoid some of the problems that strained the financial industry.

Total assets as of December 31, 2008, were $204,178,015, a 3.2
percent decrease from the $210,957,373 in assets reported at year-end 2007. The reduction in asset size was a strategic decision designed to counter the steep reduction in interest rates during 2008. To improve net interest income, the Company
increased leverage (net loans outstanding as a percentage of total assets). Net loans increased 3.4 percent to $172,080,251, compared to $166,456,800 at year-end 2007.

The deteriorating economy has negatively affected the quality of our loan portfolio. As of December 31, 2008, loans considered impaired totaled 1.39 percent of gross loans outstanding, compared to 0.71 percent at
the end of 2007. The allowance for loan loss reserves at year-end 2008 totaled $3,365,370, or 1.92 percent of gross loans outstanding and 138 percent of impaired loans. Deposits decreased in 2008 by 4.3 percent to $163,747,112, in line with our
strategic decision to improve profits by increasing leverage.

Surrey Bancorp had a sharp reduction in earnings in 2008, attributable to the severe decline
in economic conditions that affected all sectors of the economy. Net income, prior to the payment of preferred dividends, was $1,514,565, compared to $2,785,206 in 2007, a 45.6 percent decrease. The decline in earnings was primarily attributable to
a 19.3 percent decrease in net interest income, which amounted to a reduction of approximately $1,653,000. The net yield on earning assets for the year was 3.57 percent, compared to 4.56 percent in 2007. This represents a decline of 99 basis points.
The Company, like many other financial institutions, was unable to protect its interest margins when the Federal Reserve reduced short-term interest rates to near zero.

Non-interest income in 2008 totaled $2,498,111, a 4.6 percent decrease from the $2,617,933 recorded in 2007. The decline resulted from lower fees earned on the sale of mortgage and government-insured commercial loans.
Non-interest expense for the Company was $6,279,386, a 2.6 percent increase over 2007. In 2008, the Companys return on average assets was 0.74 percent and its return on average equity was 6.36 percent. These profitability measures are below
our historical levels, but remain above peer banks in North Carolina.

All subsidiary operations were profitable in 2008. Freedom Finance LLC, our sales
finance company, had profits of $46,083. SB&T Insurance, our property and casualty insurance agency, recorded a profit of $103,524. U-Vest Financial Services, our investment advisory company, had profits of $23,042 in 2008. Combined, these
operations contributed over 11 percent of the Companys net profit.

The challenging environment we faced in 2008 is still with us as we enter 2009.
In keeping with our conservative philosophy, the Board of Directors elected to participate in the Capital Purchase Program, selling $2,000,000 in preferred stock to the U.S. Treasury in January 2009. As a result, the Companys capital ratios
are well in excess of minimum levels required to be considered well-capitalized by regulatory agencies. Even in difficult times, opportunities for growth and profitable investment present themselves, and Surrey Bancorp is well-positioned to take
advantage of new opportunities. We remain committed to providing financial services at a local level and employing business strategies that ensures 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





|                                                              |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                              |  | 2008 |         |   | 2007 |   |         | 2006 |  |   | 2005    |   |  | 2004 |        
|Summary of Operations                                         |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                              |  |      |         |   |     
|Interest income                                               |  | $    | 12,356  |   |      | $ | 15,024  |      |  | $ | 13,452  |   |  | $    | 10,673  |   |  | $ | 8,307   |  
|Interest expense                                              |  |      | 5,436   |   |      |   | 6,450   |      |  |   | 5,181   |   |  |      | 3,647   |   |  |   | 2,433   |  
|                                                              |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net interest income                                           |  |      | 6,920   |   |      |   | 8,574   |      |  |   | 8,271   |   |  |      | 7,026   |   |  |   | 5,874   |  
|Provision for loan losses                                     |  |      | 800     |   |      |   | 718     |      |  |   | 614     |   |  |      | 461     |   |  |   | 325     |  
|Other income                                                  |  |      | 2,498   |   |      |   | 2,618   |      |  |   | 2,045   |   |  |      | 2,059   |   |  |   | 2,437   |  
|Other expense                                                 |  |      | 6,279   |   |      |   | 6,120   |      |  |   | 5,590   |   |  |      | 5,219   |   |  |   | 5,158   |  
|Income taxes                                                  |  |      | 825     |   |      |   | 1,569   |      |  |   | 1,461   |   |  |      | 1,204   |   |  |   | 999     |  
|                                                              |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net income                                                    |  |      | 1,514   |   |      |   | 2,785   |      |  |   | 2,651   |   |  |      | 2,201   |   |  |   | 1,829   |  
|Preferred stock dividends declared                            |  |      | (119    | ) |      |   | (119    | )    |  |   | (119    | ) |  |      | (119    | ) |  |   | (119    | )
|                                                              |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net income available to common stockholders                   |  | $    | 1,395   |   |      | $ | 2,666   |      |  | $ | 2,532   |   |  | $    | 2,082   |   |  | $ | 1,710   |  
|                                                              |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                              |  |      |         |   |     
|Per Common Share Data2                                        |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                              |  |      |         |   |     
|Net income:                                                   |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Basic                                                         |  | $    | 0.44    |   |      | $ | 0.85    |      |  | $ | 0.85    |   |  | $    | 0.71    |   |  | $ | 0.60    |  
|Diluted                                                       |  |      | 0.42    |   |      |   | 0.78    |      |  |   | 0.76    |   |  |      | 0.63    |   |  |   | 0.53    |  
|Cash dividends declared                                       |  |      | n/a     |   |      |   | 0.15    |      |  |   | n/a     |   |  |      | n/a     |   |  |   | n/a     |  
|Book value per common share                                   |  |      | 6.87    |   |      |   | 6.44    |      |  |   | 5.80    |   |  |      | 4.97    |   |  |   | 4.28    |  
|                                                              |  |      |         |   |     
|Balance Sheet                                                 |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                              |  |      |         |   |     
|Loans, net                                                    |  | $    | 172,080 |   |      | $ | 166,457 |      |  | $ | 153,852 |   |  | $    | 142,385 |   |  | $ | 133,046 |  
|Investment securities                                         |  |      | 2,161   |   |      |   | 3,118   |      |  |   | 3,649   |   |  |      | 4,129   |   |  |   | 2,692   |  
|Total assets                                                  |  |      | 204,178 |   |      |   | 210,957 |      |  |   | 187,110 |   |  |      | 179,571 |   |  |   | 157,293 |  
|Deposits                                                      |  |      | 163,747 |   |      |   | 171,180 |      |  |   | 151,091 |   |  |      | 145,856 |   |  |   | 126,954 |  
|Stockholders equity                                          |  |      | 24,383  |   |      |   | 22,983  |      |  |   | 20,027  |   |  |      | 17,261  |   |  |   | 15,045  |  
|Interest-earning assets                                       |  |      | 194,310 |   |      |   | 200,005 |      |  |   | 180,958 |   |  |      | 173,593 |   |  |   | 151,883 |  
|Interest-bearing liabilities                                  |  |      | 154,170 |   |      |   | 157,943 |      |  |   | 141,425 |   |  |      | 137,555 |   |  |   | 123,499 |  
|                                                              |  |      |         |   |     
|Selected Ratios                                               |  |      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                              |  |      |         |   |     
|Return on average assets                                      |  |      | 0.74    | % |      |   | 1.41    | %    |  |   | 1.47    | % |  |      | 1.30    | % |  |   | 1.21    | %
|Return on average equity                                      |  |      | 6.36    | % |      |   | 12.60   | %    |  |   | 14.16   | % |  |      | 13.64   | % |  |   | 12.85   | %
|Dividends declared on common stock as a percent of net income |  |      | n/a     |   |      |   | 17.80   | %    |  |   | n/a     |   |  |      | n/a     |   |  |   | n/a     |  



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

|2. | Adjusted for the effects of a common stock split effected in the form of a 20% common stock dividend declared on February 3, 2006, and a 2 for 1 common stock split effected in
the form of a common stock dividend declared on December 28, 2006.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



2



---



Consolidated Balance Sheets

December 31, 2008 and 2007





|                                                                                                                                                                                                          |  |      |             |   |      |   |            
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | -----------
|                                                                                                                                                                                                          |  | 2008 |             |   | 2007
|Assets                                                                                                                                                                                                    |  |      |             |   |      |   |            
|                                                                                                                                                                                                          |  |     
|Cash and due from banks                                                                                                                                                                                   |  | $    | 1,293,770   |   |      | $ | 2,220,733  
|Interest-bearing deposits with banks                                                                                                                                                                      |  |      | 16,503,318  |   |      |   | 27,248,499 
|Federal funds sold                                                                                                                                                                                        |  |      | 200,000     |   |      |   | 400,000    
|Investment securities available for sale                                                                                                                                                                  |  |      | 2,160,782   |   |      |   | 3,118,333  
|Restricted equity securities                                                                                                                                                                              |  |      | 1,047,464   |   |      |   | 994,014    
|Loans, net of allowance for loan losses of $3,365,370 in 2008 and $2,781,565 in 2007, respectively                                                                                                        |  |      | 172,080,251 |   |      |   | 166,456,800
|Property and equipment, net                                                                                                                                                                               |  |      | 5,044,526   |   |      |   | 4,902,097  
|Foreclosed assets                                                                                                                                                                                         |  |      | 50,414      |   |      |   | 88,840     
|Accrued interest and other income                                                                                                                                                                         |  |      | 1,008,498   |   |      |   | 1,205,247  
|Goodwill                                                                                                                                                                                                  |  |      | 120,000     |   |      |   | 120,000    
|Bank owned life insurance                                                                                                                                                                                 |  |      | 3,062,150   |   |      |   | 2,953,020  
|Other assets                                                                                                                                                                                              |  |      | 1,606,842   |   |      |   | 1,249,790  
|                                                                                                                                                                                                          |  |      |             |   |      |   |            
|Total assets                                                                                                                                                                                              |  | $    | 204,178,015 |   |      | $ | 210,957,373
|                                                                                                                                                                                                          |  |      |             |   |      |   |            
|                                                                                                                                                                                                          |  |     
|Liabilities and Stockholders Equity                                                                                                                                                                      |  |      |             |   |      |   |            
|                                                                                                                                                                                                          |  |     
|Liabilities                                                                                                                                                                                               |  |      |             |   |      |   |            
|Deposits:                                                                                                                                                                                                 |  |      |             |   |      |   |            
|Noninterest-bearing                                                                                                                                                                                       |  | $    | 24,161,085  |   |      | $ | 28,040,914 
|Interest-bearing                                                                                                                                                                                          |  |      | 139,586,027 |   |      |   | 143,139,318
|                                                                                                                                                                                                          |  |      |             |   |      |   |            
|Total deposits                                                                                                                                                                                            |  |      | 163,747,112 |   |      |   | 171,180,232
|                                                                                                                                                                                                          |  |     
|Federal funds purchased and securities sold under agreements to repurchase                                                                                                                                |  |      | 2,144,186   |   |      |   | 147,327    
|Short-term debt                                                                                                                                                                                           |  |      | 1,740,000   |   |      |   |           
|Long-term debt                                                                                                                                                                                            |  |      | 10,700,000  |   |      |   | 14,656,117 
|Dividends payable                                                                                                                                                                                         |  |      | 29,987      |   |      |   | 504,483    
|Accrued interest payable                                                                                                                                                                                  |  |      | 500,694     |   |      |   | 631,197    
|Other liabilities                                                                                                                                                                                         |  |      | 933,033     |   |      |   | 854,826    
|                                                                                                                                                                                                          |  |      |             |   |      |   |            
|Total liabilities                                                                                                                                                                                         |  |      | 179,795,012 |   |      |   | 187,974,182
|                                                                                                                                                                                                          |  |      |             |   |      |   |            
|                                                                                                                                                                                                          |  |     
|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; 3,167,568 shares issued in 2008 and 3,162,764 shares issued in 2007                                                                            |  |      | 9,270,253   |   |      |   | 9,217,939  
|Retained earnings                                                                                                                                                                                         |  |      | 12,493,763  |   |      |   | 11,141,839 
|Accumulated other comprehensive income (loss)                                                                                                                                                             |  |      | (1,338      | ) |      |   | 3,088      
|                                                                                                                                                                                                          |  |      |             |   |      |   |            
|Total stockholders equity                                                                                                                                                                                |  |      | 24,383,003  |   |      |   | 22,983,191 
|                                                                                                                                                                                                          |  |      |             |   |      |   |            
|Total liabilities and stockholders equity                                                                                                                                                                |  | $    | 204,178,015 |   |      | $ | 210,957,373
|                                                                                                                                                                                                          |  |      |             |   |      |   |            

See Notes to Consolidated Financial Statements



3



---



Consolidated Statements of Income

For the years ended December 31, 2008, 2007 and 2006





|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|-------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                           |  | 2008 |            |   | 2007 |   |            | 2006 | 
|Interest income                                                            |  |      |            |   |      |   |            |      |  |   |            |  
|Loans and fees on loans                                                    |  | $    | 11,912,386 |   |      | $ | 13,797,058 |      |  | $ | 12,488,514 |  
|Federal funds sold                                                         |  |      | 7,131      |   |      |   | 20,375     |      |  |   | 19,814     |  
|Investment securities, taxable                                             |  |      | 138,372    |   |      |   | 213,118    |      |  |   | 206,680    |  
|Deposits with banks                                                        |  |      | 298,362    |   |      |   | 993,791    |      |  |   | 737,541    |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Total interest income                                                      |  |      | 12,356,251 |   |      |   | 15,024,342 |      |  |   | 13,452,549 |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|                                                                           |  |      |           
|Interest expense                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Deposits                                                                   |  |      | 4,849,164  |   |      |   | 5,766,590  |      |  |   | 4,510,199  |  
|Federal funds purchased and securities sold under agreements to repurchase |  |      | 6,716      |   |      |   | 30,612     |      |  |   | 29,959     |  
|Short-term debt                                                            |  |      | 11,545     |   |      |   |           |      |  |   | 28,010     |  
|Long-term debt                                                             |  |      | 568,357    |   |      |   | 653,381    |      |  |   | 613,026    |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Total interest expense                                                     |  |      | 5,435,782  |   |      |   | 6,450,583  |      |  |   | 5,181,194  |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Net interest income                                                        |  |      | 6,920,469  |   |      |   | 8,573,759  |      |  |   | 8,271,355  |  
|                                                                           |  |      |           
|Provision for loan losses                                                  |  |      | 799,913    |   |      |   | 717,629    |      |  |   | 614,367    |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Net interest income after provision for loan losses                        |  |      | 6,120,556  |   |      |   | 7,856,130  |      |  |   | 7,656,988  |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|                                                                           |  |      |           
|Noninterest income                                                         |  |      |            |   |      |   |            |      |  |   |            |  
|Service charges on deposit accounts                                        |  |      | 1,153,707  |   |      |   | 1,125,212  |      |  |   | 1,019,993  |  
|Gain on sale of government guaranteed loans                                |  |      |           |   |      |   | 147,840    |      |  |   | 27,588     |  
|Fees and yield spread premiums on loans delivered to correspondents        |  |      | 136,316    |   |      |   | 209,722    |      |  |   | 243,007    |  
|Other service charges and fees                                             |  |      | 368,678    |   |      |   | 340,914    |      |  |   | 200,558    |  
|Other operating income                                                     |  |      | 839,410    |   |      |   | 794,245    |      |  |   | 554,205    |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Total noninterest income                                                   |  |      | 2,498,111  |   |      |   | 2,617,933  |      |  |   | 2,045,351  |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|                                                                           |  |      |           
|Noninterest expense                                                        |  |      |            |   |      |   |            |      |  |   |            |  
|Salaries and employee benefits                                             |  |      | 3,207,384  |   |      |   | 3,063,889  |      |  |   | 2,855,605  |  
|Occupancy expense                                                          |  |      | 410,489    |   |      |   | 374,945    |      |  |   | 377,561    |  
|Equipment expense                                                          |  |      | 322,824    |   |      |   | 330,094    |      |  |   | 336,903    |  
|Data processing                                                            |  |      | 365,017    |   |      |   | 379,042    |      |  |   | 355,698    |  
|Foreclosed assets, net                                                     |  |      | 43,260     |   |      |   | 44,367     |      |  |   | 324        |  
|Postage/printing and supplies                                              |  |      | 229,841    |   |      |   | 215,313    |      |  |   | 229,822    |  
|Professional fees                                                          |  |      | 251,747    |   |      |   | 311,513    |      |  |   | 163,182    |  
|Other expense                                                              |  |      | 1,448,824  |   |      |   | 1,400,807  |      |  |   | 1,270,997  |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Total noninterest expense                                                  |  |      | 6,279,386  |   |      |   | 6,119,970  |      |  |   | 5,590,092  |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Net income before income taxes                                             |  |      | 2,339,281  |   |      |   | 4,354,093  |      |  |   | 4,112,247  |  
|                                                                           |  |      |           
|Income tax expense                                                         |  |      | 824,716    |   |      |   | 1,568,887  |      |  |   | 1,461,354  |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Net income                                                                 |  |      | 1,514,565  |   |      |   | 2,785,206  |      |  |   | 2,650,893  |  
|Preferred stock dividends                                                  |  |      | (119,295   | ) |      |   | (119,295   | )    |  |   | (119,295   | )
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Net income available to common stockholders                                |  | $    | 1,395,270  |   |      | $ | 2,665,911  |      |  | $ | 2,531,598  |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|                                                                           |  |      |           
|Basic earnings per common share                                            |  | $    | 0.44       |   |      | $ | 0.85       |      |  | $ | 0.85       |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Diluted earnings per common share                                          |  | $    | 0.42       |   |      | $ | 0.78       |      |  | $ | 0.76       |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Basic weighted average common shares outstanding                           |  |      | 3,165,891  |   |      |   | 3,126,834  |      |  |   | 2,967,554  |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Diluted weighted average common shares outstanding                         |  |      | 3,586,927  |   |      |   | 3,564,272  |      |  |   | 3,507,794  |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  
|Dividends declared per common share                                        |  | $    |           |   |      | $ | 0.15       |      |  | $ |           |  
|                                                                           |  |      |            |   |      |   |            |      |  |   |            |  

See Notes to Consolidated Financial Statements



4



---



Consolidated Statements of Changes in Stockholders Equity

For the years ended December 31, 2008, 2007 and 2006





|                                                                                                              |  |                            |  |              |           |        |                  |   |        |                                            |           |   |       |   |            |   |  |   |         |   |  |   |            |  
|------------------------------------------------------------------------------------------------------------- |  | -------------------------- |  | ------------ | --------- | ------ | ---------------- | - | ------ | ------------------------------------------ | --------- | - | ----- | - | ---------- | - |  | - | ------- | - |  | - | ---------- | -
|                                                                                                              |  | ConvertiblePreferred Stock |  | Common Stock |           |        | RetainedEarnings |   |        | AccumulatedOtherComprehensiveIncome (Loss) |           |   | Total |  
|                                                                                                              |  | Shares                     |  | Amount       |           | Shares |                  |   | Amount |                                            |           |   |      
|Balance, December 31, 2005                                                                                    |  | 189,356                    |  | $            | 2,620,325 |        | 1,472,094        |   |        | $                                          | 8,236,917 |   |       | $ | 6,418,744  |   |  | $ | (15,200 | ) |  | $ | 17,260,786 |  
|                                                                                                              |  |                            |  |              |           |        |                 
|Comprehensive income                                                                                          |  |                            |  |              |           |        |                  |   |        |                                            |           |   |       |   |            |   |  |   |         |   |  |   |            |  
|Net income                                                                                                    |  |                           |  |              |          |        |                 |   |        |                                            |          |   |       |   | 2,650,893  |   |  |   |        |   |  |   | 2,650,893  |  
|Net change in unrealized gain (loss) on investment securities available for sale, net of income tax of $6,738 |  |                           |  |              |          |        |                 |   |        |                                            |          |   |       |   |           |   |  |   | 10,740  |   |  |   | 10,740     |  
|                                                                                                              |  |                            |  |              |           |        |                  |   |        |                                            |           |   |       |   |            |   |  |   |         |   |  |   |            |  
|Total comprehensive income                                                                                    |  |                            |  |              |           |        |                  |   |        |                                            |           |   |       |   |            |   |  |   |         |   |  |   | 2,661,633  |  
|                                                                                                              |  |                            |  |              |           |        |                 
|Common stock options exercised, net of shares surrendered in cashless exchange                                |  |                           |  |              |          |        | 29,832           |   |        |                                            | 129,355   |   |       |   |           |   |  |   |        |   |  |   | 129,355    |  
|Tax benefit related to exercise of non-qualified stock options                                                |  |                           |  |              |          |        |                 |   |        |                                            | 99,127    |   |       |   |           |   |  |   |        |   |  |   | 99,127     |  
|Fractional shares purchased                                                                                   |  |                           |  |              |          |        | (842             | ) |        |                                            | (19,641   | ) |       |   |           |   |  |   |        |   |  |   | (19,641    | )
|Stock based compensation                                                                                      |  |                           |  |              |          |        |                 |   |        |                                            | 15,489    |   |       |   |           |   |  |   |        |   |  |   | 15,489     |  
|Common stock splits effected in the form of a common stock dividend                                           |  |                           |  |              |          |        | 1,501,084        |   |        |                                            |          |   |       |   |           |   |  |   |        |   |  |   |           |  
|Dividends declared on convertible preferred stock ($.63 per share)                                            |  |                           |  |              |          |        |                 |   |        |                                            |          |   |       |   | (119,295   | ) |  |   |        |   |  |   | (119,295   | )
|                                                                                                              |  |                            |  |              |           |        |                  |   |        |                                            |           |   |       |   |            |   |  |   |         |   |  |   |            |  
|Balance, December 31, 2006                                                                                    |  | 189,356                    |  |              | 2,620,325 |        | 3,002,168        |   |        |                                            | 8,461,247 |   |       |   | 8,950,342  |   |  |   | (4,460  | ) |  |   | 20,027,454 |  
|                                                                                                              |  |                            |  |              |           |        |                 
|Comprehensive income                                                                                          |  |                            |  |              |           |        |                  |   |        |                                            |           |   |       |   |            |   |  |   |         |   |  |   |            |  
|Net income                                                                                                    |  |                           |  |              |          |        |                 |   |        |                                            |          |   |       |   | 2,785,206  |   |  |   |        |   |  |   | 2,785,206  |  
|Net change in unrealized gain (loss) on investment securities available for sale, net of income tax of $4,735 |  |                           |  |              |          |        |                 |   |        |                                            |          |   |       |   |           |   |  |   | 7,548   |   |  |   | 7,548      |  
|                                                                                                              |  |                            |  |              |           |        |                  |   |        |                                            |           |   |       |   |            |   |  |   |         |   |  |   |            |  
|Total comprehensive income                                                                                    |  |                            |  |              |           |        |                  |   |        |                                            |           |   |       |   |            |   |  |   |         |   |  |   | 2,792,754  |  
|                                                                                                              |  |                            |  |              |           |        |                 
|Common stock options exercised, net of shares surrendered in cashless exchange                                |  |                           |  |              |          |        | 160,596          |   |        |                                            | 186,467   |   |       |   |           |   |  |   |        |   |  |   | 186,467    |  
|Tax benefit related to exercise of non-qualified stock options                                                |  |                           |  |              |          |        |                 |   |        |                                            | 565,076   |   |       |   |           |   |  |   |        |   |  |   | 565,076    |  
|Stock based compensation                                                                                      |  |                           |  |              |          |        |                 |   |        |                                            | 5,149     |   |       |   |           |   |  |   |        |   |  |   | 5,149      |  
|Dividends declared on common stock ($0.15 per share)                                                          |  |                           |  |              |          |        |                 |   |        |                                            |          |   |       |   | (474,414   | ) |  |   |        |   |  |   | (474,414   | )
|Dividends declared on convertible preferred stock ($.63 per share)                                            |  |                           |  |              |          |        |                 |   |        |                                            |          |   |       |   | (119,295   | ) |  |   |        |   |  |   | (119,295   | )
|                                                                                                              |  |                            |  |              |           |        |                  |   |        |                                            |           |   |       |   |            |   |  |   |         |   |  |   |            |  
|Balance, December 31, 2007                                                                                    |  | 189,356                    |  | $            | 2,620,325 |        | 3,162,764        |   |        | $                                          | 9,217,939 |   |       | $ | 11,141,839 |   |  | $ | 3,088   |   |  | $ | 22,983,191 |  
|                                                                                                              |  |                            |  |              |           |        |                  |   |        |                                            |           |   |       |   |            |   |  |   |         |   |  |   |            |  

See Notes to Consolidated Financial Statements



5



---



Consolidated Statements of Changes in Stockholders Equity, continued

For the years ended December 31, 2008, 2007 and
2006





|                                                                                                              |  |                            |  |              |           |                  |           |        |                                            |           |  |       |            |   |  |   |        |   |  |   |            |  
|------------------------------------------------------------------------------------------------------------- |  | -------------------------- |  | ------------ | --------- | ---------------- | --------- | ------ | ------------------------------------------ | --------- |  | ----- | ---------- | - |  | - | ------ | - |  | - | ---------- | -
|                                                                                                              |  | ConvertiblePreferred Stock |  | Common Stock |           | RetainedEarnings |           |        | AccumulatedOtherComprehensiveIncome (Loss) |           |  | Total |           
|                                                                                                              |  | Shares                     |  | Amount       |           | Shares           |           | Amount |                                            |           | 
|Balance, December 31, 2007                                                                                    |  | 189,356                    |  | $            | 2,620,325 |                  | 3,162,764 |        | $                                          | 9,217,939 |  | $     | 11,141,839 |   |  | $ | 3,088  |   |  | $ | 22,983,191 |  
|                                                                                                              |  |                            |  |              |           |                  |           |        |                                            |           |  |       |            |   |  |   |        |   |  |   |            |  
|Cumulative effect of initial adoption of EITF 06-4                                                            |  |                            |  |              |           |                  |           |        |                                            |           |  |       | (43,346    | ) |  |   |        |   |  |   | (43,346    | )
|                                                                                                              |  |                            |  |              |           |                  |           |        |                                            |           |  |       |            |   |  |   |        |   |  |   |            |  
|Balance, January 1, 2008                                                                                      |  | 189,356                    |  |              | 2,620,325 |                  | 3,162,764 |        |                                            | 9,217,939 |  |       | 11,098,493 |   |  |   | 3,088  |   |  |   | 22,939,845 |  
|Net income                                                                                                    |  |                           |  |              |          |                  |          |        |                                            |          |  |       | 1,514,565  |   |  |   |       |   |  |   | 1,514,565  |  
|Net change in unrealized gain (loss) on investment securities available for sale, net of income tax of $2,777 |  |                           |  |              |          |                  |          |        |                                            |          |  |       |           |   |  |   | (4,426 | ) |  |   | (4,426     | )
|                                                                                                              |  |                            |  |              |           |                  |           |        |                                            |           |  |       |            |   |  |   |        |   |  |   |            |  
|Total comprehensive income                                                                                    |  |                            |  |              |           |                  |           |        |                                            |           |  |       |            |   |  |   |        |   |  |   | 1,510,139  |  
|Common stock options exercised                                                                                |  |                           |  |              |          |                  | 4,804     |        |                                            | 18,132    |  |       |           |   |  |   |       |   |  |   | 18,132     |  
|Stock based compensation                                                                                      |  |                           |  |              |          |                  |          |        |                                            | 34,182    |  |       |           |   |  |   |       |   |  |   | 34,182     |  
|Dividends declared on convertible preferred stock ($.63 per share)                                            |  |                           |  |              |          |                  |          |        |                                            |          |  |       | (119,295   | ) |  |   |       |   |  |   | (119,295   | )
|                                                                                                              |  |                            |  |              |           |                  |           |        |                                            |           |  |       |            |   |  |   |        |   |  |   |            |  
|Balance, December 31, 2008                                                                                    |  | 189,356                    |  | $            | 2,620,325 |                  | 3,167,568 |        | $                                          | 9,270,253 |  | $     | 12,493,763 |   |  | $ | (1,338 | ) |  | $ | 24,383,003 |  
|                                                                                                              |  |                            |  |              |           |                  |           |        |                                            |           |  |       |            |   |  |   |        |   |  |   |            |  

See Notes to Consolidated Financial Statements



6



---



Consolidated Statements of Cash Flows

For the years ended December 31, 2008, 2007 and 2006





|                                                                                                      |  |      |            |   |      |   |             |      |  |   |             |  
|----------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                                                      |  | 2008 |            |   | 2007 |   |             | 2006 | 
|Cash flows from operating activities                                                                  |  |      |            |   |      |   |             |      |  |   |             |  
|Net income                                                                                            |  | $    | 1,514,565  |   |      | $ | 2,785,206   |      |  | $ | 2,650,893   |  
|Adjustments to reconcile net income to net cash provided by operations:                               |  |      |            |   |      |   |             |      |  |   |             |  
|Depreciation and amortization                                                                         |  |      | 314,241    |   |      |   | 314,933     |      |  |   | 343,286     |  
|Provision for loan losses                                                                             |  |      | 799,913    |   |      |   | 717,629     |      |  |   | 614,367     |  
|Loss on the sale of foreclosed assets                                                                 |  |      | 43,260     |   |      |   | 44,367      |      |  |   | 324         |  
|Stock-based compensation                                                                              |  |      | 34,182     |   |      |   | 5,149       |      |  |   | 15,489      |  
|(Gain) loss on disposal of property and equipment                                                     |  |      | 15,693     |   |      |   | (3,046      | )    |  |   |            |  
|Deferred income taxes                                                                                 |  |      | (228,008   | ) |      |   | (198,034    | )    |  |   | (114,682    | )
|Accretion of discount on securities, net of amortization of premiums                                  |  |      | (8,023     | ) |      |   | (57,283     | )    |  |   | (47,638     | )
|Changes in assets and liabilities:                                                                    |  |      |            |   |      |   |             |      |  |   |             |  
|Accrued income                                                                                        |  |      | 196,749    |   |      |   | (158,104    | )    |  |   | (233,476    | )
|Increase in cash surrender value of life insurance                                                    |  |      | (109,130   | ) |      |   | (105,883    | )    |  |   | (106,717    | )
|Other assets                                                                                          |  |      | (126,267   | ) |      |   | 107,521     |      |  |   | (133,433    | )
|Accrued interest payable                                                                              |  |      | (130,503   | ) |      |   | 26,304      |      |  |   | 292,024     |  
|Other liabilities                                                                                     |  |      | 34,861     |   |      |   | 172,266     |      |  |   | 223,569     |  
|                                                                                                      |  |      |            |   |      |   |             |      |  |   |             |  
|Net cash provided by operating activities                                                             |  |      | 2,351,533  |   |      |   | 3,756,908   |      |  |   | 3,610,723   |  
|                                                                                                      |  |      |            |   |      |   |             |      |  |   |             |  
|                                                                                                      |  |      |           
|Cash flows from investing activities                                                                  |  |      |            |   |      |   |             |      |  |   |             |  
|Net decrease (increase) in interest-bearing deposits with banks                                       |  |      | 10,745,181 |   |      |   | (10,629,521 | )    |  |   | 3,896,604   |  
|Net decrease in federal funds sold                                                                    |  |      | 200,000    |   |      |   | 9,000       |      |  |   | 95,000      |  
|Purchases of investment securities                                                                    |  |      | (4,558,260 | ) |      |   | (4,447,272  | )    |  |   | (4,981,162  | )
|Maturities of investment securities                                                                   |  |      | 5,516,631  |   |      |   | 5,047,251   |      |  |   | 5,526,756   |  
|Purchases of restricted equity securities                                                             |  |      | (53,450    | ) |      |   | (77,184     | )    |  |   | (44,100     | )
|Redemption of restricted equity securities                                                            |  |      |           |   |      |   | 134,400     |      |  |   |            |  
|Net increase in loans                                                                                 |  |      | (6,667,952 | ) |      |   | (13,884,835 | )    |  |   | (12,427,509 | )
|Proceeds from the sale of foreclosed assets                                                           |  |      | 239,754    |   |      |   | 506,708     |      |  |   | 304,395     |  
|Proceeds from sale of property and equipment                                                          |  |      | 4,715      |   |      |   | 9,900       |      |  |   |            |  
|Purchases of property and equipment                                                                   |  |      | (477,078   | ) |      |   | (780,627    | )    |  |   | (178,591    | )
|                                                                                                      |  |      |            |   |      |   |             |      |  |   |             |  
|Net cash provided by (used in) investing activities                                                   |  |      | 4,949,541  |   |      |   | (24,218,063 | )    |  |   | (7,915,324  | )
|                                                                                                      |  |      |            |   |      |   |             |      |  |   |             |  
|                                                                                                      |  |      |           
|Cash flows from financing activities                                                                  |  |      |            |   |      |   |             |      |  |   |             |  
|Net increase (decrease) in deposits                                                                   |  |      | (7,433,120 | ) |      |   | 20,088,962  |      |  |   | 5,235,599   |  
|Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase |  |      | 1,996,859  |   |      |   | (362,468    | )    |  |   | (648,121    | )
|Net increase in short-term debt                                                                       |  |      | 1,740,000  |   |      |   |            |      |  |   |            |  
|Net increase (decrease) in long-term debt                                                             |  |      | (3,956,117 | ) |      |   | 492,630     |      |  |   | (331,038    | )
|Dividends paid on preferred stock                                                                     |  |      | (119,295   | ) |      |   | (119,295    | )    |  |   | (119,295    | )
|Dividends paid on common stock                                                                        |  |      | (474,496   | ) |      |   |            |      |  |   |            |  
|Fractional shares purchased                                                                           |  |      | 0          |   |      |   |            |      |  |   | (19,641     | )
|Stock options exercised                                                                               |  |      | 18,132     |   |      |   | 186,467     |      |  |   | 129,355     |  
|Tax benefit related to exercise of non-qualified stock options                                        |  |      |           |   |      |   | 565,076     |      |  |   | 99,127      |  
|                                                                                                      |  |      |            |   |      |   |             |      |  |   |             |  
|Net cash (used in) provided by financing activities                                                   |  |      | (8,228,037 | ) |      |   | 20,851,372  |      |  |   | 4,345,986   |  
|                                                                                                      |  |      |            |   |      |   |             |      |  |   |             |  
|Net increase (decrease) in cash and cash equivalents                                                  |  |      | (926,963   | ) |      |   | 390,217     |      |  |   | 41,385      |  
|Cash and cash equivalents, beginning                                                                  |  |      | 2,220,733  |   |      |   | 1,830,516   |      |  |   | 1,789,131   |  
|                                                                                                      |  |      |            |   |      |   |             |      |  |   |             |  
|Cash and cash equivalents, ending                                                                     |  | $    | 1,293,770  |   |      | $ | 2,220,733   |      |  | $ | 1,830,516   |  
|                                                                                                      |  |      |            |   |      |   |             |      |  |   |             |  

Continued



7



---



Consolidated Statements of Cash Flows, continued

For the years ended December 31, 2008, 2007 and 2006





|                                                  |  |      |           |      |   |           |  |   |          
|------------------------------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                                  |  | 2008 |           | 2007 |   | 2006     
|Supplemental disclosures of cash flow information |  |      |           |      |   |           |  |   |          
|Interest paid                                     |  | $    | 5,566,285 |      | $ | 6,424,279 |  | $ | 4,889,170
|                                                  |  |      |           |      |   |           |  |   |          
|Income taxes paid                                 |  | $    | 1,231,235 |      | $ | 1,096,476 |  | $ | 1,623,610
|                                                  |  |      |           |      |   |           |  |   |          
|Loans transferred to foreclosed properties        |  | $    | 244,588   |      | $ | 562,412   |  | $ | 346,177  
|                                                  |  |      |           |      |   |           |  |   |          

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 Freedom Finance, LLC (originally named Friendly Finance, LLC) a subsidiary operation specializing in the purchase of sales finance contracts from local
automobile dealers.

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

Critical Accounting Policies

Management believes the policies with respect to the methodology for the determination of the allowance for loan losses, and asset impairment judgments,
including the recoverability of intangible assets involve a higher degree of complexity and require management to make difficult and subjective judgments which often require assumptions or estimates about highly uncertain matters. Changes in these
judgments, assumptions or estimates could cause reported results to differ materially. These critical policies and their application are periodically reviewed with the Audit Committee and the 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. For more information on business segments see Note 21.

Use of Estimates

The preparation of financial statements in conformity with U.S. 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 the Companys entire 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. These deposits are primarily at the Federal Home Loan
Bank of Atlanta and Silverton Bank (formerly The Bankers Bank) and are in sweep accounts, which sweep excess funds out nightly and invest the funds in accounts that pay a daily rate that mirrors the federal funds rate. Other deposits included in
this category are short-term certificates of deposit.

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. No securities held by the Company for the periods presented were
classified as held to maturity.

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 and are recorded on a trade-date basis. Premiums and discounts are recognized in interest income using the interest method
over the period to maturity or to call dates.



10



---



Notes to
Consolidated Financial Statements





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



Securities Available for Sale, continued



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. In determining whether other than temporary impairment exist, management considers many factors,
including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and the ability of the Company to retain its
investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

Loans Held for Sale

Government guaranteed loans originated in the normal course of business are sometimes sold into the secondary market. These sales are of the
guaranteed portion of the loans only. The loans are generally variable rate loans which eliminates the market risk to the Bank and are therefore carried at cost.

Loans Receivable

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or
pay-off 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 using the interest method.
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 the interest accrual is
discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. Payments received on nonaccrual loans are first applied to principal and any residual amounts are then
applied to interest. 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 impaired. For loans that are
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.

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 |  | 10-40
|Furniture and equipment    |  | 3-25 

Foreclosed Assets

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 consists 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.

Employee Benefit Plans

The Company has a defined contribution plan qualifying under IRS Code Section 401(k). Employee contributions are matched by the Company up to the first six percent of an employees contribution for 2008. In
previous years the Company match was up to the first four percent of an employees contribution. The Company match is expensed as incurred.

The
Company has a noncontributory, nonqualified supplemental executive retirement plan (SERP) covering certain executive employees. The plan calls for monthly payments payable for the life of the executive, generally beginning at the age of
65. The SERP costs, which are actuarially determined and recorded on an unfunded basis, are charged to current operations and credited to a liability account on the consolidated balance sheet.

The Company has a deferred compensation plan under which directors may elect to defer their directors fees. Participating directors receive an additional 30%
matching contribution from the Company. Benefit payments are paid for a specific number of years, generally beginning at age 65. The deferred compensation cost, including the



12



---



Notes to
Consolidated Financial Statements





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



Employee Benefit Plans, continued



Companys matching contribution, are charged to current operations and credited to a liability account on the consolidated balance sheet.

Stock-based Compensation

During the first quarter of 2006,
the Company adopted the provisions of, and began accounting for stock-based compensation in accordance with, the Financial Accounting Standards Boards (FASB) Statement of Financial Accounting Standards No. 123-revised 2004 (SFAS 123R),
Share-Based Payment which replaces Statement of Financial Accounting Standards No. 123 (SFAS 123), Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25 (APB 25), Accounting for Stock Issued to
Employees. Under the fair value recognition provisions of this statement, stock-based compensation is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite
service period, which is the vesting period. The Company elected the modified prospective method, under which prior periods are not revised for comparative purposes. The valuation provisions of SFAS 123R apply to new grants and to grants that were
outstanding as of the effective date and are subsequently modified. Estimated compensation for the grants that were outstanding as of the effective date will be recognized over the remaining service period using the compensation cost estimated for
the SFAS 123 pro forma disclosures.

The adoption of SFAS 123R did not have a material impact on the Companys consolidated financial position,
results of operations and cash flows. See Note 15 for further information regarding the Companys stock based compensation assumptions and expenses.

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.

The Company classifies interest accrued on unrecognized tax benefits with interest expense. Penalties accrued on unrecognized tax
benefits are classified with operating expenses.



13



---



Notes to
Consolidated Financial Statements





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



Income Taxes, continued



In 2006, the FASB issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes
 an Interpretation of SFAS No. 109. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with SFAS No. 109, Accounting for Income
Taxes. FIN 48 also prescribes a recognition threshold and measurement of a tax position taken or expected to be taken in an enterprises tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006.
Accordingly, Surrey Bancorp adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 did not have any impact on the Companys consolidated financial position or operations.

Basic Earnings per Common Share

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

Diluted Earnings per Common Share

The computation of diluted
earnings per common 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.

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 stockholders. It consists of net income plus certain other changes in assets and liabilities that are reported as separate components of stockholders equity rather than as
income or expense.

Advertising Cost

The
Company incurred marketing and advertising cost of $132,453, $123,360 and $138,170 for the years ended December 31, 2008, 2007, and 2006, 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.

Fair Value of Financial Instruments

SFAS 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. SFAS 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.



14



---



Notes to
Consolidated Financial Statements





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



Fair Value of Financial Instruments, continued



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

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

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

Federal funds sold: Due to the
short-term nature of these assets, the carrying value approximates fair value.

Securities: Fair values for securities, excluding restricted equity
securities, are based on quoted market prices, where available. If quoted 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.

Bank owned life insurance:The carrying amount reported in the balance sheet approximates the fair
value as it represents the cash surrender value of the life insurance.

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

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.



15



---



Notes to
Consolidated Financial Statements





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



Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, (SFAS 141(R)) which replaces SFAS 141. SFAS 141(R) establishes principles and requirements for how an acquirer in a business
combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any controlling interest; recognizes and measures goodwill acquired in the business combination or a gain from a bargain
purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. FAS 141(R) is effective for acquisitions by the Company taking place on or
after January 1, 2009. Early adoption is prohibited. Accordingly, a calendar year-end company is required to record and disclose business combinations following existing accounting guidance until January 1, 2009. The Company will assess
the impact of SFAS 141(R) if and when a future acquisition occurs.

Also, in December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests
in Consolidated Financial Statements  an amendment of Accounting Research Bulletin (ARB) No. 51 (SFAS 160). SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. Before this statement, limited guidance existed for reporting noncontrolling interests (minority interest). As a result, diversity in practice exists. In some cases minority interest is reported as a liability and in
others it is reported in the mezzanine section between liabilities and equity. Specifically, SFAS 160 requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the
parents equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS 160 clarifies that changes in a parents ownership interest in a
subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize gain or loss in net income when a subsidiary is
deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS 160 also includes expanded disclosure requirements regarding the interests of the parent and its
noncontrolling interests. SFAS 160 is effective for the Company on January 1, 2009. SFAS 160 had no impact on the Companys financial position, results of operations or cash flows.

In February 2008, the FASB issued FASB Staff Position No. 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions
(FSP 140-3). This FSP provides guidance on accounting for a transfer of a financial asset and the transferors repurchase financing of the asset. This FSP presumes that an initial transfer of a financial asset and a repurchase
financing are considered part of the same arrangement (linked transaction) under SFAS No. 140. However, if certain criteria are met, the initial transfer and repurchase financing are not evaluated as a linked transaction and are evaluated
separately under Statement 140. FSP 140-3 was effective for the Company on January 1, 2009, and had no material impact on the Companys financial position, results of operations or cash flows.

In April 2008, the FASB issued FASB Staff f Position No. 142-3, Determination of the Useful Life of Intangible Assets (FSP 142-3). This FSP
amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. The intent of
this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R) and other U.S.
generally accepted accounting principles. This FSP is effective for the Company on January 1, 2009, and had no material impact on its financial position, results of operations or cash flows.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, (SFAS No. 162). SFAS No. 162
identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles
(GAAP) in the United States (the GAAP hierarchy). SFAS No. 162 is effective November 15, 2008. The FASB has stated that it does not expect SFAS No. 162 will result in a change in current practice. The application of SFAS No. 162
had no effect on the Companys financial position, results of operations or cash flows.



16



---



Notes to
Consolidated Financial Statements





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



Recent Accounting Pronouncements, continued



In June, 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, Determining Whether Instruments Granted in
Share-Based Payments Transactions are Participating Securities, (FSP EITF 03-6-1). The Staff Position provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are
participating securities and must be included in the earnings per share computation. FSP EITF 03-6-1 was effective January 1, 2009 and had no effect on the Companys financial position, results of operations, earnings per share or cash
flow.

The SECs Office of the Chief Accountant and the staff of the FASB issued press release 2008-234 on September 30, 2008 (Press
Release) to provide clarifications on fair value accounting. The press release includes guidance on the use of managements internal assumptions and the use of market quotes. It also reiterates the factors in SEC Staff
Accounting Bulletin (SAB) Topic 5M which should be considered when determining other-than-temporary impairment: the length of time and extent to which the market value has been less than cost; financial condition and near-term prospects
of the issuer; and the intent and ability of the holder to retain its investment for a period of time sufficient to allow for any anticipated recovery in market value.

On October 10, 2008, the FASB issued FSP SFAS 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (FSP SFAS 157-3). This FSP clarifies the
application of SFAS No. 157, Fair Value Measurements (see Note 11) in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that
asset is not active. The FSP is effective upon issuance, including prior periods for which financial statements have not been issued. For the Company, this FSP is effective for the quarter ended September 30, 2008.

The Company considered the guidance in the Press Release and in FSP SFAS 157-3 when conducting its review for other-than-temporary impairment as of December 31,
2008 as discussed in Note 3.

FSP SFAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and
Interests in Variable Interest Entities, (SFAS 140-4 and FIN 46(R)-8) was issued in December 2008 to require public entities to disclose additional information about transfers of financial assets and to require public enterprises to
provide additional disclosures about their involvement with variable interest entities. The FSP also requires certain disclosures for public enterprises that are sponsors and servicers of qualifying special purpose entities. The FSP is effective for
the first reporting period ending after December 31, 2008. This FSP had no material impact on the financial position of the Company.

FSP EITF
99-20-1, Amendments to the Impairment Guidance of EITF Issue No. 99-20, (FSP EITF 99-20-1) was issued in January 2009. Prior to the Staff Position, other-than-temporary impairment was determined by using either EITF Issue
No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial Interest and Beneficial Interest that Continue to be Held by a Transferor in Securitized Financial Assets, (EITF 99-20) or SFAS No. 115,
Accounting for Certain Investments in Debt and Equity Securities, (SFAS 115) depending on the type of security. EITF 99-20 requires the use of market participant assumptions regarding future cash flows regarding the
probability of collecting all cash flows previously projected. SFAS 115 determined impairment to be other than temporary if it was probable the holder would be unable to collect all amounts due according to the contractual terms. To achieve a more
consistent determination of other-than-temporary impairment, the Staff Position amends EITF 99-20 to determine any other-than-temporary impairment based on the guidance in SFAS 115, allowing management to use more judgment in determining any
other-than-temporary impairment. The Staff Position is effective for interim and annual reporting periods ending after December 15, 2008 and shall be applied prospectively. Retroactive application is not permitted. Management has reviewed the
Companys security portfolio and evaluated the portfolio for any other-than-temporary impairment as discussed in Note 3.

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



17



---



Notes to
Consolidated Financial Statements





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 $806,000 and $1,104,000 for the periods
including December 31, 2008 and 2007, 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 available for sale and their approximate fair values at December 31,
2008 and 2007 follow:



|                                 |  |               |           |                 |   |                  |  |           |        |  |   |          
|-------------------------------- |  | ------------- | --------- | --------------- | - | ---------------- |  | --------- | ------ |  | - | ---------
|                                 |  | AmortizedCost |           | UnrealizedGains |   | UnrealizedLosses |  | FairValue
|2008                             |  |               |           |                 |   |                  |  |           |        |  |   |          
|Government-sponsored enterprises |  | $             | 1,512,503 |                 | $ | 21,557           |  | $         |       |  | $ | 1,534,060
|Mortgage-backed securities       |  |               | 100,457   |                 |   | 197              |  |           | 887    |  |   | 99,767   
|Corporate bonds                  |  |               | 550,000   |                 |   |                 |  |           | 23,045 |  |   | 526,955  
|                                 |  |               |           |                 |   |                  |  |           |        |  |   |          
|                                 |  | $             | 2,162,960 |                 | $ | 21,754           |  | $         | 23,932 |  | $ | 2,160,782
|                                 |  |               |           |                 |   |                  |  |           |        |  |   |          
|2007                             |  |               |           |                 |   |                  |  |           |        |  |   |          
|Government-sponsored enterprises |  | $             | 2,996,111 |                 | $ | 4,986            |  | $         | 597    |  | $ | 3,000,500
|Mortgage-backed securities       |  |               | 117,196   |                 |   | 648              |  |           | 11     |  |   | 117,833  
|                                 |  |               |           |                 |   |                  |  |           |        |  |   |          
|                                 |  | $             | 3,113,307 |                 | $ | 5,634            |  | $         | 608    |  | $ | 3,118,333
|                                 |  |               |           |                 |   |                  |  |           |        |  |   |          

Restricted equity securities were $1,047,464 and $994,014 at December 31, 2008 and 2007, respectively.
Restricted equity securities primarily 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, 2008 and 2007, substantially all investment securities were pledged as collateral on public deposits and for other purposes as required or permitted by law.

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, 2008, were as follows:



|                                       |  |               |           |           |   |          
|-------------------------------------- |  | ------------- | --------- | --------- | - | ---------
|                                       |  | AmortizedCost |           | FairValue
|Due in one year or less                |  | $             | 500,871   |           | $ | 508,320  
|Due after one year through five years  |  |               | 1,011,632 |           |   | 1,025,740
|Due after five years through ten years |  |               | 591,828   |           |   | 568,311  
|Due after ten years                    |  |               | 58,629    |           |   | 58,411   
|                                       |  |               |           |           |   |          
|                                       |  | $             | 2,162,960 |           | $ | 2,160,782
|                                       |  |               |           |           |   |          

For the years ended December 31, 2008, 2007 and 2006, the Company had no realized gains or losses from the
sale of investment securities. All were held to their scheduled maturity dates or call date.



18



---



Notes to
Consolidated Financial Statements





Note 3. Securities, continued

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, 2008 and 2007. These unrealized losses on investment securities are a result of volatility in interest rates and relate to mortgage backed securities and corporate bonds issued by other banks at December 31, 2008.



|                                 |  |                     |           |                   |   |           |  |                  |       |           |   |                  |  |   |           |  |   |       
|-------------------------------- |  | ------------------- | --------- | ----------------- | - | --------- |  | ---------------- | ----- | --------- | - | ---------------- |  | - | --------- |  | - | ------
|                                 |  | Less Than 12 Months |           | 12 Months or More |   | Total    
|                                 |  | FairValue           |           | UnrealizedLosses  |   | FairValue |  | UnrealizedLosses |       | FairValue |   | UnrealizedLosses
|2008                             |  |                     |           |                   |   |           |  |                  |       |           |   |                  |  |   |           |  |   |       
|Government-sponsored enterprises |  | $                   |          |                   | $ |          |  | $                |      |           | $ |                 |  | $ |          |  | $ |      
|Mortgage backed securities       |  |                     | 61,229    |                   |   | 861       |  |                  | 9,271 |           |   | 26               |  |   | 70,500    |  |   | 887   
|Corporate bonds                  |  |                     | 526,955   |                   |   | 23,045    |  |                  |      |           |   |                 |  |   | 526,955   |  |   | 23,045
|                                 |  |                     |           |                   |   |           |  |                  |       |           |   |                  |  |   |           |  |   |       
|                                 |  | $                   | 588,184   |                   | $ | 23,906    |  | $                | 9,271 |           | $ | 26               |  | $ | 597,455   |  | $ | 23,932
|                                 |  |                     |           |                   |   |           |  |                  |       |           |   |                  |  |   |           |  |   |       
|2007                             |  |                     |           |                   |   |           |  |                  |       |           |   |                  |  |   |           |  |   |       
|Government-sponsored enterprises |  | $                   | 1,495,750 |                   | $ | 597       |  | $                |      |           | $ |                 |  | $ | 1,495,750 |  | $ | 597   
|Mortgage backed securities       |  |                     | 12,267    |                   |   | 11        |  |                  |      |           |   |                 |  |   | 12,267    |  |   | 11    
|                                 |  |                     |           |                   |   |           |  |                  |       |           |   |                  |  |   |           |  |   |       
|                                 |  | $                   | 1,508,017 |                   | $ | 608       |  | $                |      |           | $ |                 |  | $ | 1,508,017 |  | $ | 608   
|                                 |  |                     |           |                   |   |           |  |                  |       |           |   |                  |  |   |           |  |   |       

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.

Note 4. Loans Receivable

The major components of loans in the balance sheets at December 31, 2008 and 2007 are as follows:



|                                                                  |  |      |             |   |      |   |             |  
|----------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                                  |  | 2008 |             |   | 2007 |  
|Commercial                                                        |  | $    | 122,125,641 |   |      | $ | 117,802,940 |  
|Real estate:                                                      |  |      |             |   |      |   |             |  
|Construction and land development                                 |  |      | 4,123,370   |   |      |   | 4,149,219   |  
|Residential, 1-4 families                                         |  |      | 35,582,692  |   |      |   | 35,064,796  |  
|Farmland                                                          |  |      | 256,698     |   |      |   | 307,586     |  
|Nonfarm, nonresidential                                           |  |      | 2,420,716   |   |      |   | 570,276     |  
|Agricultural                                                      |  |      | 63,574      |   |      |   | 89,914      |  
|Consumer, net of discounts of $32,908 in 2008 and $63,276 in 2007 |  |      | 10,723,046  |   |      |   | 10,945,019  |  
|Other                                                             |  |      | 123,386     |   |      |   | 295,290     |  
|                                                                  |  |      |             |   |      |   |             |  
|                                                                  |  |      | 175,419,123 |   |      |   | 169,225,040 |  
|                                                                  |  |     
|Deferred loan origination costs, net of fees                      |  |      | 26,498      |   |      |   | 13,325      |  
|                                                                  |  |      |             |   |      |   |             |  
|                                                                  |  |      | 175,445,621 |   |      |   | 169,238,365 |  
|Allowance for loan losses                                         |  |      | (3,365,370  | ) |      |   | (2,781,565  | )
|                                                                  |  |      |             |   |      |   |             |  
|                                                                  |  | $    | 172,080,251 |   |      | $ | 166,456,800 |  
|                                                                  |  |      |             |   |      |   |             |  



19



---



Notes to
Consolidated Financial Statements





Note 5. Allowance for Loan Losses

Changes in the allowance for loan losses are as follows:



|                                  |  |      |           |   |      |   |           |      |  |   |           |  
|--------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                  |  | 2008 |           |   | 2007 |   |           | 2006 | 
|Balance, beginning                |  | $    | 2,781,565 |   |      | $ | 2,531,305 |      |  | $ | 2,311,298 |  
|                                  |  |      |          
|Provision charged to expense      |  |      | 799,913   |   |      |   | 717,629   |      |  |   | 614,367   |  
|Recoveries of amounts charged off |  |      | 41,110    |   |      |   | 51,140    |      |  |   | 118,877   |  
|Amounts charged off               |  |      | (257,218  | ) |      |   | (518,509  | )    |  |   | (513,237  | )
|                                  |  |      |           |   |      |   |           |      |  |   |           |  
|Balance, ending                   |  | $    | 3,365,370 |   |      | $ | 2,781,565 |      |  | $ | 2,531,305 |  
|                                  |  |      |           |   |      |   |           |      |  |   |           |  

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



|                                              |  |      |           |      |   |          
|--------------------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                              |  | 2008 |           | 2007
|Impaired loans without a valuation allowance  |  | $    | 443,124   |      | $ | 337,133  
|Impaired loans with a valuation allowance     |  |      | 1,990,260 |      |   | 865,131  
|                                              |  |      |           |      |   |          
|Total impaired loans                          |  | $    | 2,433,384 |      | $ | 1,202,264
|                                              |  |      |           |      |   |          
|Valuation allowance related to impaired loans |  | $    | 756,492   |      | $ | 187,919  
|                                              |  |      |           |      |   |          

The average annual recorded investment in impaired loans and interest income recognized on impaired loans for the
years ended December 31, 2008, 2007, and 2006, (all approximate) are summarized below:



|                                                             |  |      |         |      |   |         |  |   |        
|------------------------------------------------------------ |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                                                             |  | 2008 |         | 2007 |   | 2006   
|Average investment in impaired loans                         |  | $    | 542,000 |      | $ | 243,000 |  | $ | 474,000
|                                                             |  |      |         |      |   |         |  |   |        
|Interest income recognized on impaired loans                 |  | $    | 34,600  |      | $ | 25,800  |  | $ | 21,300 
|                                                             |  |      |         |      |   |         |  |   |        
|Interest income recognized on a cash basis on impaired loans |  | $    | 1,900   |      | $ | 7,200   |  | $ | 13,600 
|                                                             |  |      |         |      |   |         |  |   |        

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

Nonaccrual loans were $544,061 and $350,141 at December 31, 2008 and December 31, 2007, respectively, and are included in the table above. There were $36,725
and $49,001 in loans past due 90 days or more at December 31, 2008 and 2007, respectively, not included in nonaccrual loans.

Note 6. Loan
Servicing

During 2005, the Company began selling the guaranteed portion of certain government guaranteed commercial loans in the secondary market. The
Company continues to service these loans that totaled $7,733,952 and $8,456,948 at December 31, 2008 and 2007, respectively. Management believes the value of the servicing asset approximates the fair value of the services the Company must
perform related to these loans. Accordingly, no servicing asset or liability is recognized at December 31, 2008 or 2007. Gains on the sale of government guaranteed loans are presented as a separate component of noninterest income on the
consolidated statements of income for the years ended December 31, 2008, 2007, and 2006.



20



---



Notes to
Consolidated Financial Statements





Note 7. Property and Equipment

Components of property and equipment and total accumulated depreciation at December 31, 2008 and 2007 are as follows:



|                              |  |      |            |   |      |   |            |  
|----------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                              |  | 2008 |            |   | 2007 |  
|Land and improvements         |  | $    | 1,575,620  |   |      | $ | 1,449,822  |  
|Buildings and improvements    |  |      | 3,773,371  |   |      |   | 3,184,975  |  
|Furniture and equipment       |  |      | 2,406,587  |   |      |   | 2,227,879  |  
|Construction in progress      |  |      | 24,642     |   |      |   | 516,888    |  
|                              |  |      |            |   |      |   |            |  
|                              |  |      | 7,780,220  |   |      |   | 7,379,564  |  
|Less accumulated depreciation |  |      | (2,735,694 | ) |      |   | (2,477,467 | )
|                              |  |      |            |   |      |   |            |  
|                              |  | $    | 5,044,526  |   |      | $ | 4,902,097  |  
|                              |  |      |            |   |      |   |            |  

Depreciation expense amounted to $314,241, $314,933 and $343,286 for the years ended December 31, 2008, 2007,
and 2006, respectively.

The Companys West Pine Street branch and former Stuart branch (land only) are leased under operating leases at a monthly
rental of $1,969 and $1,546, respectively. The West Pine Street lease is for a five-year term, which expires March 31, 2010. The Company has the option to renew the lease for three additional five-year terms. The former Stuart, Virginia branch
land lease is a month-to-month lease that terminated in early 2009 when the vacated modular unit was moved to a lot adjacent to the Main branch in Mount Airy. Rental expense was $42,174, $41,810 and $41,149 for 2008, 2007 and 2006, respectively.

Pursuant to the terms of non-cancelable lease agreements in effect at December 31, 2008, pertaining to banking premises and equipment, future minimum
rent commitments under various operating leases are as follows:



|                    |  |   |       
|------------------- |  | - | ------
|2009                |  | $ | 23,625
|2010                |  |   | 5,906 
|2011 and thereafter |  |   |      
|                    |  |   |       
|                    |  | $ | 29,531
|                    |  |   |       

Note 8. Deposits

The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2008 and 2007, was $32,755,026 and $38,482,107, respectively. At December 31, 2008, the scheduled maturities of total time deposits are as
follows:



|           |  |   |           
|---------- |  | - | ----------
|2009       |  | $ | 90,475,869
|2010       |  |   | 2,968,684 
|2011       |  |   | 2,603,197 
|Thereafter |  |   | 2,544,329 
|           |  |   |           
|           |  | $ | 98,592,079
|           |  |   |           



21



---



Notes to
Consolidated Financial Statements





Note 9. Short-Term Debt

Short-term debt consists of Federal Home Loan Bank advances that have original maturities of 12 months or less, federal funds purchased and securities sold under agreements to repurchase, which generally mature within one to four days from
the transaction date, and a variable rate instrument tied to the one-month LIBOR rate. The rate on the variable rate instrument as of December 31, 2008 was 3.90%. Additional information at December 31, 2008, 2007, and 2006, and for the
periods then ended is summarized below:



|                                                     |  |      |           |   |      |   |           |      |  |   |           |  
|---------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                     |  | 2008 |           |   | 2007 |   |           | 2006 | 
|Outstanding balance at December 31                   |  | $    | 3,884,186 |   |      | $ | 147,327   |      |  | $ | 509,795   |  
|                                                     |  |      |           |   |      |   |           |      |  |   |           |  
|Year-end weighted average rate                       |  |      | 1.69      | % |      |   | 3.20      | %    |  |   | 4.40      | %
|                                                     |  |      |           |   |      |   |           |      |  |   |           |  
|Daily average outstanding during the year            |  | $    | 701,027   |   |      | $ | 696,780   |      |  | $ | 725,809   |  
|                                                     |  |      |           |   |      |   |           |      |  |   |           |  
|Average rate for the year                            |  |      | 2.60      | % |      |   | 4.39      | %    |  |   | 4.13      | %
|                                                     |  |      |           |   |      |   |           |      |  |   |           |  
|Maximum outstanding at any month-end during the year |  | $    | 4,041,527 |   |      | $ | 1,266,342 |      |  | $ | 1,100,650 |  
|                                                     |  |      |           |   |      |   |           |      |  |   |           |  

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 $15,000,000 and a secured line of credit with the Federal Home
Loan Bank of Atlanta of approximately $17,010,000. At December 31, 2008, the outstanding amount due on the unsecured lines with correspondent banks was $2,000,000. There were no outstanding balances due on the unsecured lines of credit with
correspondent banks at December 31, 2007. Amounts due to the Federal Home Loan Bank of Atlanta on the secured line of credit at December 31, 2008 and 2007 amounted to $12,200,000 and $13,450,000, respectively. Of the $12,200,000
outstanding at December 31, 2008, $1,500,000 was classified as short-term debt and $10,700,000 was classified as long-term debt. At December 31, 2007 the entire $13,450,000 was classified as long-term debt.

Note 10. Long-Term Debt

The Companys long-term debt includes
instruments bearing fixed rates ranging from 3.72% to 4.99% and convertible rate instruments bearing rates ranging from 3.71% to 4.95%. The weighted average rate of all long-term debt at December 31, 2008 was 4.30%. Collateral consist of real
estate, substantially all 1-4 family first and second lien and revolving residential real estate loans and certain investment securities. The contractual maturities of long-term debt are as follows:



|           |  |   |           
|---------- |  | - | ----------
|2009       |  | $ | 3,000,000 
|2010       |  |   | 2,250,000 
|2011       |  |   | 1,350,000 
|2012       |  |   | 350,000   
|Thereafter |  |   | 3,750,000 
|           |  |   |           
|           |  | $ | 10,700,000
|           |  |   |           

Note 11. Fair Value

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available for sale, trading securities and derivatives, if present, are
recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets.
These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.



22



---



Notes to
Consolidated Financial Statements





Note 11. Fair Value, continued



Fair Value Hierarchy

Under SFAS 157, the Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine
fair value. These levels are:



|        |  |                                                                                                                                                                                                                                                                                                                                                                                   
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Level 1 |  | Valuation is based upon quoted prices for identical instruments traded in active markets.                                                                                                                                                                                                                                                                                         
|        | 
|Level 2 |  | Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation
techniques for which all significant assumptions are observable in the market.                                                                                                      
|        | 
|Level 3 |  | Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions
that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

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

Investment Securities Available for Sale

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

Loans

The Company does not record loans at fair value on a
recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual
terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with SFAS 114, Accounting by Creditors for Impairment of a Loan, (SFAS 114). The fair value
of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for
which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At December 31, 2008, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. In
accordance with SFAS 157, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a
current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no
observable market price, the Company records the impaired loan as nonrecurring Level 3.



23



---



Notes to
Consolidated Financial Statements





Note 11. Fair Value, continued



Foreclosed Assets

Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices,
appraised values of the collateral or managements estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as
nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset
as nonrecurring Level 3.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

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



|                                         |  |       |       |         |   |         |  |         |       |  |   |  
|---------------------------------------- |  | ----- | ----- | ------- | - | ------- |  | ------- | ----- |  | - | -
|(in thousands)                           |  |       |       |         |   |         |  |        
|December 31, 2008                        |  | Total |       | Level 1 |   | Level 2 |  | Level 3
|Investment securities available for sale |  | $     | 2,161 |         | $ |        |  | $       | 2,161 |  | $ | 
|                                         |  |       |       |         |   |         |  |         |       |  |   |  
|Total assets at fair value               |  | $     | 2,161 |         | $ |        |  | $       | 2,161 |  | $ | 
|                                         |  |       |       |         |   |         |  |         |       |  |   |  
|Total liabilities at fair value          |  | $     |      |         | $ |        |  | $       |      |  | $ | 
|                                         |  |       |       |         |   |         |  |         |       |  |   |  

The Company had no Level 3 assets measured at fair value on a recurring basis at December 31, 2008.

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

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



|                                |  |       |       |         |   |         |  |         |       |  |   |  
|------------------------------- |  | ----- | ----- | ------- | - | ------- |  | ------- | ----- |  | - | -
|(in thousands)                  |  |       |       |         |   |         |  |        
|December 31, 2008               |  | Total |       | Level 1 |   | Level 2 |  | Level 3
|Impaired Loans                  |  | $     | 1,234 |         | $ |        |  | $       | 1,234 |  | $ | 
|Foreclosed assets               |  |       | 50    |         |   |        |  |         | 50    |  |   | 
|                                |  |       |       |         |   |         |  |         |       |  |   |  
|Total assets at fair value      |  | $     | 1,284 |         | $ |        |  | $       | 1,284 |  | $ | 
|                                |  |       |       |         |   |         |  |         |       |  |   |  
|Total liabilities at fair value |  | $     |      |         | $ |        |  | $       |      |  | $ | 
|                                |  |       |       |         |   |         |  |         |       |  |   |  

The Company had no Level 3 assets measured at fair value on a non-recurring basis at December 31, 2008.



24



---



Notes to
Consolidated Financial Statements





Note 11. Fair Value, continued



Financial Instruments

Fair Values

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



|                                                                           |  |                   |         |                   |   |                |  |           |         |  |   |        
|-------------------------------------------------------------------------- |  | ----------------- | ------- | ----------------- | - | -------------- |  | --------- | ------- |  | - | -------
|                                                                           |  | December 31, 2008 |         | December 31, 2007
|                                                                           |  | CarryingAmount    |         | FairValue         |   | CarryingAmount |  | FairValue
|Financial assets                                                           |  |                   |         |                   |   |                |  |           |         |  |   |        
|Cash and due from banks                                                    |  | $                 | 1,294   |                   | $ | 1,294          |  | $         | 2,221   |  | $ | 2,221  
|Federal funds sold and interest-bearing deposits with banks                |  |                   | 16,703  |                   |   | 16,703         |  |           | 27,648  |  |   | 27,648 
|Securities, available for sale                                             |  |                   | 2,161   |                   |   | 2,161          |  |           | 3,118   |  |   | 3,118  
|Restricted equity securities                                               |  |                   | 1,047   |                   |   | 1,047          |  |           | 994     |  |   | 994    
|Loans, net of allowance for loan losses                                    |  |                   | 172,080 |                   |   | 181,549        |  |           | 166,457 |  |   | 167,578
|Bank owned life insurance                                                  |  |                   | 3,062   |                   |   | 3,062          |  |           | 2,953   |  |   | 2,953  
|                                                                           |  |                   |         |                  
|Financial liabilities                                                      |  |                   |         |                   |   |                |  |           |         |  |   |        
|Deposits                                                                   |  |                   | 163,747 |                   |   | 160,442        |  |           | 171,181 |  |   | 167,557
|Federal funds purchased and securities sold under agreements to repurchase |  |                   | 2,144   |                   |   | 2,146          |  |           | 147     |  |   | 147    
|Long-term and short-term debt                                              |  |                   | 12,440  |                   |   | 12,701         |  |           | 14,656  |  |   | 14,787 
|Commitments and contingencies                                              |  |                   |        |                   |   |               |  |           |        |  |   |       

Note 12. Stockholders Equity

In February, 2006, the Company declared a 20% common stock split effected in the form of a dividend that was retroactively applied to the previous years earnings per share and other related calculations.

On December 28, 2006, the Company declared a 2 for 1 common stock split effected in the form of a common stock dividend for shareholders of record on
February 15, 2007. The effects of the 2 for 1 common stock split effected in the form of a common stock dividend have been retroactively applied to the current and previous years earnings per share and other related calculations.

In September 2006, the FASB ratified the consensuses reached by the FASBs Emerging Issues Task Force (EITF) relating to EITF 06-4, Accounting for
the Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangement (EITF 06-4). Entities purchase life insurance for various reasons including protection against loss of key employees and to fund
postretirement benefits. The two most common types of life insurance arrangements are endorsement split dollar life, which the Company owns, and collateral assignment split dollar life. EITF 06-4 covers the former and EITF 06-10 covers the latter.
EITF 06-4 states that entities with endorsement split-dollar life insurance arrangements that provide a benefit to an employee that extends to postretirement periods should recognize a liability for future benefits in accordance with SFAS
No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions, (if, in substance, a postretirement benefit plan exists) or Accounting Principles Board (APB) Opinion No. 12, Omnibus Opinion1967 (if
the arrangement is, in substance, an individual deferred compensation contract). The Company recognized the effects of applying this issue as a change in accounting principle through a cumulative-effect adjustment to retained earnings. The reduction
of beginning retained earnings resulting from the cumulative-effect of the adoption of EITF 06-4 was $43,346. Expense amounting to approximately $14,785 was recognized in salaries and benefits expense in the period ended December 31, 2008.



25



---



Notes to
Consolidated Financial Statements





Note 13. Earnings Per Share

The following table details the computation of basic and diluted earnings per share for the years ended December 31, 2008, 2007, and 2006.



|                                                    |  |      |           |   |      |   |           |      |  |   |           |  
|--------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                    |  | 2008 |           |   | 2007 |   |           | 2006 | 
|Net income                                          |  | $    | 1,514,565 |   |      | $ | 2,785,206 |      |  | $ | 2,650,893 |  
|Preferred stock dividends                           |  |      | (119,295  | ) |      |   | (119,295  | )    |  |   | (119,295  | )
|                                                    |  |      |           |   |      |   |           |      |  |   |           |  
|Net income available to common shareholders         |  | $    | 1,395,270 |   |      | $ | 2,665,911 |      |  | $ | 2,531,598 |  
|                                                    |  |      |           |   |      |   |           |      |  |   |           |  
|Weighted average common shares outstanding          |  |      | 3,165,891 |   |      |   | 3,126,834 |      |  |   | 2,967,554 |  
|                                                    |  |      |          
|Effect of dilutive securities:                      |  |      |           |   |      |   |           |      |  |   |           |  
|Options                                             |  |      | 25,888    |   |      |   | 42,290    |      |  |   | 145,092   |  
|Convertible preferred stock                         |  |      | 395,148   |   |      |   | 395,148   |      |  |   | 395,148   |  
|                                                    |  |      |           |   |      |   |           |      |  |   |           |  
|Weighted average common shares outstanding, diluted |  |      | 3,586,927 |   |      |   | 3,564,272 |      |  |   | 3,507,794 |  
|                                                    |  |      |           |   |      |   |           |      |  |   |           |  
|                                                    |  |      |          
|Basic earnings per share                            |  | $    | 0.44      |   |      | $ | 0.85      |      |  | $ | 0.85      |  
|                                                    |  |      |           |   |      |   |           |      |  |   |           |  
|Diluted earnings per share                          |  | $    | 0.42      |   |      | $ | 0.78      |      |  | $ | 0.76      |  
|                                                    |  |      |           |   |      |   |           |      |  |   |           |  

Note 14. Employee Benefit Plans

The Company has a defined contribution plan (the Plan) qualifying under IRS Code Section 401(k). Eligible participants in the Plan can contribute up to the maximum percentage allowable not to exceed the dollar
limit under IRC Section 401(k). Employee contributions were matched by the Company based on 100% of the first four percent of an employees contribution for 2006 and 2007. Beginning in 2008, the Company began matching 100% of the first six
percent of an employees contribution. For the years ended December 31, 2008, 2007 and 2006, the Company contributed $136,496, $89,420 and $83,059 to the Plan, respectively.

During 2005, the Company adopted a Supplemental Retirement Benefit Plan (SERP) to provide future compensation to certain members of management upon retirement. Under plan provisions, payments projected to range from
$16,388 to $89,914, per year, are payable for the life of the executive, generally beginning at age 65. The liability accrued for the compensation under the plan was $336,388 and $244,379 at December 31, 2008 and 2007, respectively. Employee
benefits expense, an actuarially determined amount, was $92,009, $94,610, and $82,959 for the years ended December 31, 2008, 2007, and 2006, respectively. The assumed discount rate for the plan was 7.0% at December 31, 2008, 2007, and
2006.

During 2005, the Company also adopted a deferred compensation plan under which directors may elect to defer their directors fees.
Participating directors receive an additional 30% matching contribution and will be paid an annual benefit for a specified number of years after retirement, generally beginning at age 65. The maximum payout period is ten years. The liability accrued
for deferred directors fees was $398,090 and $300,341 at December 31, 2008, and 2007, respectively. Deferred directors fees expensed under the plan for the years ended December 31, 2008, 2007, and 2006 were $97,749, $164,550,
and $72,511, respectively.

The Company has purchased and is the primary beneficiary of life insurance policies indirectly related to the Supplemental
Retirement Benefit Plan and the directors deferred compensation liability. The cash value of the life insurance policies totaled $3,062,150 and $2,953,020 at December 31, 2008 and 2007, respectively.



26



---



Notes to
Consolidated Financial Statements





Note 15. Stock Based Compensation

Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004), Share-Based Payment, (SFAS No. 123R) which was issued by the FASB in December 2004. SFAS No. 123R revises
SFAS No. 123, Accounting for Stock Based Compensation, and supersedes APB No. 25, Accounting for Stock Issued to Employees, and its related interpretations. SFAS No. 123R requires recognition of the services received in
exchange for an award based on the grant-date fair value of the award. SFAS No. 123R also amends SFAS No. 95, Statement of Cash Flows, to require that excess tax benefits be reported as financing cash inflows, rather than as a
reduction of taxes paid, which is included within operating cash flows.

The Company adopted SFAS No. 123R using the modified prospective application
as permitted under SFAS No. 123R. Accordingly, prior period amounts have not been restated. Under this application, the Company is required to record compensation expense for all awards granted after the date of adoption and for the unvested
portion of previously granted awards that remain outstanding at the date of adoption. Prior to the adoption of SFAS No. 123R, the Company used the intrinsic value method as prescribed by APB Opinion No. 25, Accounting for Stock Issued
to Employees (APB No. 25), and thus recognized no compensation expense for options granted with exercise prices equal to the fair market value of the Companys common stock on the date of grant.

The Company has two share-based compensation plans, which are described below. The compensation cost that has been charged against income for those plans was
approximately $51,791 and $7,801 for the years ended December 31, 2008 and 2007, respectively. The income tax benefit recognized for share-based compensation arrangements was approximately $17,609 and $2,652 for the years ended
December 31, 2008 and 2007, respectively.

The Company has a qualified incentive stock option plan which reserves, as amended, 89,080 shares (adjusted
for stock exchange, splits, dividends and exercised shares) for purchase by eligible employees. Options granted under this plan vest at the rate of 20% per year, expire not more than ten years from the date of grant, and are exercisable at not
less than the fair market value of the stock at the date of the grant. This plan expired on June 1, 2007. Before the plan expired, the 43,296 remaining shares available for grant were granted.

The Company also has a non-qualified stock option plan, which reserves, as amended, 22,512 shares (adjusted for stock exchange, splits, dividends and exercised shares)
for purchase by non-employee directors. Options granted under this plan are exercisable after six months from the date of the grant at not less than the fair market value of the stock at the date of the grant. The life of such options shall not
extend more than ten years from the date of the grant. This plan also expired on June 1, 2007. The six remaining shares not grated as of that date expired.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. The risk-free interest rate is based on the U.S. Treasury rate for the expected life at the time of grant. Volatility is
based on the volatilities of our trading history. The expected life is based on the average life of the options of 10 years and the weighted average graded vesting period of 5 years, and forfeitures are considered immaterial based on the
historical data of the Company. The following table illustrates the assumptions for the Black-Scholes model used in determining the fair value of options granted to employees for the year ended December 31, 2007. No options were granted during
the year ended December 31, 2008, due to the expiration of the plan.



|               |  |                            |  
|-------------- |  | -------------------------- | -
|               |  | Year EndedDecember 31,2007 |  
|Dividend yield |  | 0.00                       | %
|Risk-free rate |  | 4.87                       | %
|Volatility     |  | 21.59                      | %
|Expected life  |  | 10 years                   |  



27



---



Notes to
Consolidated Financial Statements





Note 15. Stock Based Compensation, continued



A summary of option activity under the stock option plans during the years ended December 31, 2008, 2007, and
2006 is presented below:



|                             |  |                  |   |  |                    |   |  |                              |      
|---------------------------- |  | ---------------- | - |  | ------------------ | - |  | ---------------------------- | -----
|                             |  | OptionsAvailable |   |  | OptionsOutstanding |   |  | WeightedAverageExercisePrice
|Balance at December 31, 2005 |  | 21,651           |   |  | 156,872            |   |  | $                            | 5.38 
|                             |  |                  |  
|Exercised                    |  |                 |   |  | (30,778            | ) |  |                              | 4.96 
|Authorized                   |  |                 |   |  |                   |   |  |                              |     
|Forfeited                    |  |                 |   |  |                   |   |  |                              |     
|Granted                      |  |                 |   |  |                   |   |  |                              |     
|2 for 1 common stock split   |  | 21,651           |   |  | 126,094            |   |  |                              |     
|                             |  |                  |   |  |                    |   |  |                              |      
|Balance at December 31, 2006 |  | 43,302           |   |  | 252,188            |   |  |                              | 2.74 
|                             |  |                  |  
|Exercised                    |  |                 |   |  | (179,088           | ) |  |                              | 2.49 
|Authorized                   |  |                 |   |  |                   |   |  |                              |     
|Forfeited                    |  |                 |   |  |                   |   |  |                              |     
|Granted                      |  | (43,296          | ) |  | 43,296             |   |  |                              | 13.27
|Expired                      |  | (6               | ) |  |                   |   |  |                              |     
|                             |  |                  |   |  |                    |   |  |                              |      
|Balance at December 31, 2007 |  |                 |   |  | 116,396            |   |  |                              | 7.07 
|                             |  |                  |  
|Exercised                    |  |                 |   |  | (4,804             | ) |  |                              | 3.77 
|Authorized                   |  |                 |   |  |                   |   |  |                              |     
|Forfeited                    |  |                 |   |  |                   |   |  |                              |     
|Granted                      |  |                 |   |  |                   |   |  |                              |     
|Expired                      |  |                 |   |  |                   |   |  |                              |     
|                             |  |                  |   |  |                    |   |  |                              |      
|Balance at December 31, 2008 |  |                 |   |  | 111,592            |   |  |                              | 7.21 
|                             |  |                  |   |  |                    |   |  |                              |      

The following table sets forth the exercise prices, the number of options outstanding and the number of options
exercisable at December 31, 2008:



|               |               |                             |         |                               |   |                                                  |  |                             |  |                               |  |   |      
|-------------- | ------------- | --------------------------- | ------- | ----------------------------- | - | ------------------------------------------------ |  | --------------------------- |  | ----------------------------- |  | - | -----
|Exercise Price |               | Number ofOptionsOutstanding |         | WeightedAverageExercise Price |   | Weighted AverageContractual LifeRemaining(Years) |  | Number ofOptionsExercisable |  | WeightedAverageExercise Price
|$              | 3.03          |                             | 5,668   |                               | $ | 3.03                                             |  | 0.6                         |  | 5,668                         |  | $ | 3.03 
|               | 3.95          |                             | 13,306  |                               |   | 3.95                                             |  | 2.1                         |  | 13,306                        |  |   | 3.95 
|               | 2.57          |                             | 38,144  |                               |   | 2.57                                             |  | 2.6                         |  | 38,144                        |  |   | 2.57 
|               | 5.30          |                             | 7,578   |                               |   | 5.30                                             |  | 4.5                         |  | 7,578                         |  |   | 5.30 
|               | 6.15          |                             | 3,600   |                               |   | 6.15                                             |  | 5.3                         |  | 2,880                         |  |   | 6.15 
|               | 13.27         |                             | 43,296  |                               |   | 13.27                                            |  | 8.4                         |  | 8,659                         |  |   | 13.27
|               |               |                             |         |                               |   |                                                  |  |                             |  |                               |  |   |      
|               | Total/Average |                             | 111,592 |                               |   | 7.21                                             |  | 4.9                         |  | 76,235                        |  |   | 4.46 
|               |               |                             |         |                               |   |                                                  |  |                             |  |                               |  |   |      



28



---



Notes to
Consolidated Financial Statements





Note 15. Stock Based Compensation, continued



The following table sets forth information pertaining to the Companys exercisable options and options expected
to vest, as of December 31, 2008:



|                                                                                |  |   |        
|------------------------------------------------------------------------------- |  | - | -------
|Incentive and non qualified stock options:                                      |  |   |        
|Fair value of options granted during period expected to vest                    |  | $ |       
|                                                                                |  |   |        
|Aggregate intrinsic value of exercisable and nonvested options expected to vest |  | $ | 317,144
|                                                                                |  |   |        
|Number of nonvested options expected to vest                                    |  |   | 35,357 
|                                                                                |  |   |        
|Weighted average price of nonvested options expected to vest                    |  | $ | 13.12  
|                                                                                |  |   |        
|Weighted average remaining life of nonvested options expected to vest           |  |   | 3.11   
|                                                                                |  |   |        
|Intrinsic value of nonvested options expected to vest                           |  | $ |       
|                                                                                |  |   |        

As of December 31, 2008, there was $117,131 of total unrecognized compensation cost related to non-vested
share-based compensation arrangements granted under the Companys stock option plans. That cost is expected to be recognized over a weighted-average period of 3.11 years. The total fair value of shares vested during the year ended
December 31, 2008 was $115,545

Note 16. Income Taxes

Current and Deferred Income Tax Components

The components of income tax expense are as follows:



|         |  |      |           |   |      |   |           |      |  |   |           |  
|-------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|         |  | 2008 |           |   | 2007 |   |           | 2006 | 
|Current  |  | $    | 1,052,724 |   |      | $ | 1,766,921 |      |  | $ | 1,576,036 |  
|Deferred |  |      | (228,008  | ) |      |   | (198,034  | )    |  |   | (114,682  | )
|         |  |      |           |   |      |   |           |      |  |   |           |  
|         |  | $    | 824,716   |   |      | $ | 1,568,887 |      |  | $ | 1,461,354 |  
|         |  |      |           |   |      |   |           |      |  |   |           |  

Rate Reconciliation

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



|                                             |  |      |         |   |      |   |           |      |  |   |           |  
|-------------------------------------------- |  | ---- | ------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                             |  | 2008 |         |   | 2007 |   |           | 2006 | 
|Expected tax expense                         |  | $    | 795,356 |   |      | $ | 1,480,392 |      |  | $ | 1,398,164 |  
|State income tax, net of federal tax benefit |  |      | 78,091  |   |      |   | 138,285   |      |  |   | 143,305   |  
|Tax exempt income                            |  |      | (66,312 | ) |      |   | (54,956   | )    |  |   | (93,283   | )
|Other                                        |  |      | 17,581  |   |      |   | 5,166     |      |  |   | 13,168    |  
|                                             |  |      |         |   |      |   |           |      |  |   |           |  
|                                             |  | $    | 824,716 |   |      | $ | 1,568,887 |      |  | $ | 1,461,354 |  
|                                             |  |      |         |   |      |   |           |      |  |   |           |  



29



---



Notes to
Consolidated Financial Statements





Note 16. Income Taxes, continued



Deferred Income Tax Analysis

The significant components of net deferred tax assets at December 31, 2008 and 2007 are summarized as follows:



|                                                                                             |  |      |           |      |   |          
|-------------------------------------------------------------------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                                                                             |  | 2008 |           | 2007
|Deferred tax assets                                                                          |  |      |           |      |   |          
|Allowance for loan losses                                                                    |  | $    | 1,229,730 |      | $ | 1,003,217
|Deferred compensation liability                                                              |  |      | 283,141   |      |   | 209,990  
|Net unrealized loss on securities available for sale                                         |  |      | 2,777     |      |   |         
|Interest income on non-accrual loans                                                         |  |      | 13,347    |      |   |         
|Lower of cost or market adjustment on loans transferred from available for sale to portfolio |  |      | 43,717    |      |   | 47,112   
|                                                                                             |  |      |           |      |   |          
|                                                                                             |  |      | 1,572,712 |      |   | 1,260,319
|                                                                                             |  |      |           |      |   |          
|                                                                                             |  |     
|Deferred tax liabilities                                                                     |  |      |           |      |   |          
|Depreciation                                                                                 |  |      | 295,413   |      |   | 220,994  
|Net unrealized gain on securities available for sale                                         |  |      |          |      |   | 1,938    
|Net deferred loan fees                                                                       |  |      | 10,215    |      |   | 5,137    
|Other                                                                                        |  |      | 14,481    |      |   | 12,370   
|                                                                                             |  |      |           |      |   |          
|                                                                                             |  |      | 320,109   |      |   | 240,439  
|                                                                                             |  |      |           |      |   |          
|Net deferred tax asset                                                                       |  | $    | 1,252,603 |      | $ | 1,019,880
|                                                                                             |  |      |           |      |   |          

The Company files tax returns in the United States Federal jurisdiction and the states of North Carolina and
Virginia.

The Company classifies interest and penalties related to income tax assessments, if any, in interest expense or non-interest expense,
respectively in the consolidated statements of operations. Tax years 2005 through 2007 are subject to examination by the Internal Revenue Service, North Carolina Department of Revenue, and the Virginia Department of Taxation. The Company
has analyzed the tax positions taken or expected to be taken in its tax returns and has concluded it has no liability related to uncertain tax positions in accordance with FIN 48.

Note 17. 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.



30



---



Notes to
Consolidated Financial Statements





Note 17. Commitments and Contingencies, continued



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, 2008 and 2007 is as follows:



|                                                               |  |      |            |      |   |           
|-------------------------------------------------------------- |  | ---- | ---------- | ---- | - | ----------
|                                                               |  | 2008 |            | 2007
|Commitments to extend credit, including unused lines of credit |  | $    | 36,421,508 |      | $ | 27,851,465
|Standby letters of credit                                      |  |      | 2,036,638  |      |   | 1,480,754 
|                                                               |  |      |            |      |   |           
|                                                               |  | $    | 38,458,146 |      | $ | 29,332,219
|                                                               |  |      |            |      |   |           

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 $3,900,000 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: heavy and civil engineering construction, motion picture and sound recording, crop production, trucking, used car dealers, metal products
fabrication and building construction.

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 18. Regulatory Restrictions

Dividends

The Companys principal source of funds for dividend payments is dividends received from the Bank. The Bank, as a North Carolina banking
corporation, may pay cash dividends only out of undivided profits as determined pursuant to North Carolina banking laws. However, regulatory authorities may limit payment of dividends by a bank when it is determined that such a limitation is in the
public interest and is necessary to ensure financial soundness of the Bank.



31



---



Notes to
Consolidated Financial Statements





Note 18. Regulatory Restrictions, continued



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 $2,277,000 at December 31, 2008. No 23A transactions were deemed to exist between the Company and the Bank at December 31, 2008 and 2007.

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, 2008, that the Bank
meets all capital adequacy requirements to which it is subject.

As of December 31, 2008, 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 after that notification that management believes to have changed the institutions category.



32



---



Notes to
Consolidated Financial Statements





Note 18. Regulatory Restrictions, continued



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



|                          |  |        |        |       |                                            |   |        |                                                                      |        |  |      |        |  |       |        |  |       |  
|------------------------- |  | ------ | ------ | ----- | ------------------------------------------ | - | ------ | -------------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------ |  | ----- | -
|                          |  | Actual |        |       | MinimumRequired ForCapitalAdequacyPurposes |   |        | Minimum To BeWell CapitalizedUnder PromptCorrective ActionProvisions |       
|                          |  | Amount |        | Ratio |                                            |   | Amount |                                                                      | Ratio  |  |      | Amount |  | Ratio |       
|December 31, 2008         |  |        |        |       |                                            |   |        |                                                                      |        |  |      |        |  |       |        |  |       |  
|Total Capital             |  |        |        |       |                                            |   |        |                                                                      |        |  |      |        |  |       |        |  |       |  
|(to Risk-Weighted Assets) |  |        |        |       |                                            |   |        |                                                                      |        |  |      |        |  |       |        |  |       |  
|Consolidated              |  | $      | 25,160 |       | 14.75                                      | % |        | $                                                                    | 13,649 |  | 8.00 | %      |  | $     | n/a    |  | n/a   | %
|Surrey Bank & Trust       |  | $      | 23,548 |       | 13.80                                      | % |        | $                                                                    | 13,648 |  | 8.00 | %      |  | $     | 17,060 |  | 10.00 | %
|Tier I Capital            |  |        |        |       |                                            |   |        |                                                                      |        |  |      |        |  |       |        |  |       |  
|(to Risk-Weighted Assets) |  |        |        |       |                                            |   |        |                                                                      |        |  |      |        |  |       |        |  |       |  
|Consolidated              |  | $      | 23,012 |       | 13.49                                      | % |        | $                                                                    | 6,824  |  | 4.00 | %      |  | $     | n/a    |  | n/a   | %
|Surrey Bank & Trust       |  | $      | 21,400 |       | 12.54                                      | % |        | $                                                                    | 6,824  |  | 4.00 | %      |  | $     | 10,236 |  | 6.00  | %
|Tier I Capital            |  |        |        |       |                                            |   |        |                                                                      |        |  |      |        |  |       |        |  |       |  
|(to Average Assets)       |  |        |        |       |                                            |   |        |                                                                      |        |  |      |        |  |       |        |  |       |  
|Consolidated              |  | $      | 23,012 |       | 11.38                                      | % |        | $                                                                    | 8,089  |  | 4.00 | %      |  | $     | n/a    |  | n/a   | %
|Surrey Bank & Trust       |  | $      | 21,400 |       | 10.58                                      | % |        | $                                                                    | 8,090  |  | 4.00 | %      |  | $     | 10,113 |  | 5.00  | %
|                          |  |        |        |       |                                            |  
|December 31, 2007         |  |        |        |       |                                            |   |        |                                                                      |        |  |      |        |  |       |        |  |       |  
|Total Capital             |  |        |        |       |                                            |   |        |                                                                      |        |  |      |        |  |       |        |  |       |  
|(to Risk-Weighted Assets) |  |        |        |       |                                            |   |        |                                                                      |        |  |      |        |  |       |        |  |       |  
|Consolidated              |  | $      | 23,911 |       | 14.49                                      | % |        | $                                                                    | 13,198 |  | 8.0  | %      |  | $     | n/a    |  | n/a   | %
|Surrey Bank & Trust       |  | $      | 22,197 |       | 13.46                                      | % |        | $                                                                    | 13,190 |  | 8.0  | %      |  | $     | 16,488 |  | 10.00 | %
|Tier I Capital            |  |        |        |       |                                            |   |        |                                                                      |        |  |      |        |  |       |        |  |       |  
|(to Risk-Weighted Assets) |  |        |        |       |                                            |   |        |                                                                      |        |  |      |        |  |       |        |  |       |  
|Consolidated              |  | $      | 21,840 |       | 13.24                                      | % |        | $                                                                    | 6,599  |  | 4.0  | %      |  | $     | n/a    |  | n/a   | %
|Surrey Bank & Trust       |  | $      | 20,127 |       | 12.21                                      | % |        | $                                                                    | 6,595  |  | 4.0  | %      |  | $     | 9,893  |  | 6.00  | %
|Tier I Capital            |  |        |        |       |                                            |   |        |                                                                      |        |  |      |        |  |       |        |  |       |  
|(to Average Assets)       |  |        |        |       |                                            |   |        |                                                                      |        |  |      |        |  |       |        |  |       |  
|Consolidated              |  | $      | 21,840 |       | 10.70                                      | % |        | $                                                                    | 8,162  |  | 4.0  | %      |  | $     | n/a    |  | n/a   | %
|Surrey Bank & Trust       |  | $      | 20,127 |       | 9.86                                       | % |        | $                                                                    | 8,162  |  | 4.0  | %      |  | $     | 10,203 |  | 5.00  | %

Note 19. 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:



|                   |  |      |            |   |      |   |            |  
|------------------ |  | ---- | ---------- | - | ---- | - | ---------- | -
|                   |  | 2008 |            |   | 2007 |  
|Balance, beginning |  | $    | 6,196,064  |   |      | $ | 1,855,400  |  
|                   |  |     
|New loans          |  |      | 2,869,538  |   |      |   | 6,394,702  |  
|Repayments         |  |      | (2,052,807 | ) |      |   | (2,054,038 | )
|                   |  |      |            |   |      |   |            |  
|Balance, ending    |  | $    | 7,012,795  |   |      | $ | 6,196,064  |  
|                   |  |      |            |   |      |   |            |  

Deposit transactions with related parties at December 31, 2008 and 2007 were insignificant.



33



---



Notes to
Consolidated Financial Statements





Note 20. Investment in Freedom Finance, LLC

The condensed balance sheets of Freedom Finance, LLC, as of December 31, 2008 and 2007, and the related condensed statements of income and cash flows for each of the three years in the period ended
December 31, 2008, are presented below:

Condensed Balance Sheets

December 31, 2008 and 2007



|                                                                                                |  |      |           |      |   |           |  
|----------------------------------------------------------------------------------------------- |  | ---- | --------- | ---- | - | --------- | -
|                                                                                                |  | 2008 |           | 2007 |  
|Assets                                                                                          |  |      |           |      |   |           |  
|                                                                                                |  |     
|Cash and due from banks                                                                         |  | $    | 33,398    |      | $ | 48,221    |  
|Loans, net of allowance for loan losses of $178,687 and $258,915 in 2008 and 2007, respectively |  |      | 1,608,187 |      |   | 2,330,239 |  
|Property and equipment, net                                                                     |  |      | 2,907     |      |   | 5,317     |  
|Foreclosed assets                                                                               |  |      | 22,206    |      |   | 88,840    |  
|Other assets                                                                                    |  |      | 104,392   |      |   | 202,989   |  
|                                                                                                |  |      |           |      |   |           |  
|                                                                                                |  | $    | 1,771,090 |      | $ | 2,675,606 |  
|                                                                                                |  |      |           |      |   |           |  
|Liabilities and Capital                                                                         |  |      |           |      |   |           |  
|                                                                                                |  |     
|Liabilities                                                                                     |  |      |           |      |   |           |  
|Short-term debt                                                                                 |  | $    | 240,000   |      | $ |          |  
|Long-term debt                                                                                  |  |      |          |      |   | 1,200,000 |  
|Other liabilities                                                                               |  |      | 7,665     |      |   | (1,736    | )
|                                                                                                |  |      |           |      |   |           |  
|                                                                                                |  |      | 247,665   |      |   | 1,198,264 |  
|                                                                                                |  |      |           |      |   |           |  
|                                                                                                |  |     
|Capital                                                                                         |  |      |           |      |   |           |  
|Equity                                                                                          |  |      | 642,078   |      |   | 642,078   |  
|Retained earnings                                                                               |  |      | 881,347   |      |   | 835,264   |  
|                                                                                                |  |      |           |      |   |           |  
|                                                                                                |  |      | 1,523,425 |      |   | 1,477,342 |  
|                                                                                                |  |      |           |      |   |           |  
|                                                                                                |  | $    | 1,771,090 |      | $ | 2,675,606 |  
|                                                                                                |  |      |           |      |   |           |  

Condensed Statements of Income

For the years ended December 31, 2008, 2007, and 2006



|                               |  |      |         |      |   |         |      |  |   |          |  
|------------------------------ |  | ---- | ------- | ---- | - | ------- | ---- |  | - | -------- | -
|                               |  | 2008 |         | 2007 |   |         | 2006 | 
|Income                         |  |      |         |      |   |         |      |  |   |          |  
|Interest income                |  | $    | 476,304 |      | $ | 680,633 |      |  | $ | 612,966  |  
|Other income                   |  |      | 2,083   |      |   | 4,502   |      |  |   | 2,497    |  
|                               |  |      |         |      |   |         |      |  |   |          |  
|Total income                   |  |      | 478,387 |      |   | 685,135 |      |  |   | 615,463  |  
|                               |  |      |         |      |   |         |      |  |   |          |  
|                               |  |      |        
|Expenses                       |  |      |         |      |   |         |      |  |   |          |  
|Interest expense               |  |      | 35,767  |      |   | 124,143 |      |  |   | 84,079   |  
|Provision for loan losses      |  |      | 22,871  |      |   | 284,901 |      |  |   | 392,020  |  
|Salaries and employee benefits |  |      | 127,306 |      |   | 121,351 |      |  |   | 117,385  |  
|Occupancy expense              |  |      | 14,915  |      |   | 13,381  |      |  |   | 12,854   |  
|Equipment expense              |  |      | 8,131   |      |   | 6,715   |      |  |   | 10,623   |  
|Foreclosed assets, net         |  |      | 43,260  |      |   | 37,695  |      |  |   | 3,945    |  
|Other expense                  |  |      | 180,054 |      |   | 158,611 |      |  |   | 117,267  |  
|                               |  |      |         |      |   |         |      |  |   |          |  
|Total expense                  |  |      | 432,304 |      |   | 746,797 |      |  |   | 738,173  |  
|                               |  |      |         |      |   |         |      |  |   |          |  
|Net income (loss)              |  | $    | 46,083  |      | $ | (61,662 | )    |  | $ | (122,710 | )
|                               |  |      |         |      |   |         |      |  |   |          |  



34



---



Notes to
Consolidated Financial Statements





Note 20. Investment in Freedom Finance, LLC, continued



Condensed Statements of Cash Flows

For the years ended December 31, 2008, 2007, and 2006



|                                                                                 |  |      |            |   |      |   |          |      |  |   |            |  
|-------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | -------- | ---- |  | - | ---------- | -
|                                                                                 |  | 2008 |            |   | 2007 |   |          | 2006 | 
|Cash flows from operating activities                                             |  |      |            |   |      |   |          |      |  |   |            |  
|Net income (loss)                                                                |  | $    | 46,083     |   |      | $ | (61,662  | )    |  | $ | (122,710   | )
|Adjustments to reconcile net income to net cash provided by operating activities |  |      |            |   |      |   |          |      |  |   |            |  
|Depreciation                                                                     |  |      | 2,410      |   |      |   | 2,605    |      |  |   | 2,809      |  
|Provision for loan losses                                                        |  |      | 22,871     |   |      |   | 284,901  |      |  |   | 392,020    |  
|Deferred income taxes                                                            |  |      | 30,569     |   |      |   | 40,396   |      |  |   | (77,378    | )
|Net increase in other assets                                                     |  |      | 134,662    |   |      |   | (43,579  | )    |  |   | (73,508    | )
|Net decrease in other liabilities                                                |  |      | 9,401      |   |      |   | (23,566  | )    |  |   | 7,169      |  
|                                                                                 |  |      |            |   |      |   |          |      |  |   |            |  
|Net cash provided by operating activities                                        |  |      | 245,996    |   |      |   | 199,095  |      |  |   | 128,402    |  
|                                                                                 |  |      |            |   |      |   |          |      |  |   |            |  
|                                                                                 |  |      |           
|Cash flows from investing activities                                             |  |      |            |   |      |   |          |      |  |   |            |  
|Net decrease in interest-bearing deposits with banks                             |  |      |           |   |      |   |         |      |  |   | 2,575      |  
|Purchase of property and equipment                                               |  |      |           |   |      |   |         |      |  |   | (1,365     | )
|Net (increase) decrease in loans                                                 |  |      | 699,181    |   |      |   | 299,083  |      |  |   | (1,832,919 | )
|                                                                                 |  |      |            |   |      |   |          |      |  |   |            |  
|Net cash provided in (used in) investing activities                              |  |      | 699,181    |   |      |   | 299,083  |      |  |   | (1,831,709 | )
|                                                                                 |  |      |            |   |      |   |          |      |  |   |            |  
|                                                                                 |  |      |           
|Cash flows from financing activities                                             |  |      |            |   |      |   |          |      |  |   |            |  
|Net increase in short-term debt                                                  |  |      | 240,000    |   |      |   |         |      |  |   |           |  
|Net increase (decrease) in long-term debt                                        |  |      | (1,200,000 | ) |      |   | (500,000 | )    |  |   | 1,700,000  |  
|                                                                                 |  |      |            |   |      |   |          |      |  |   |            |  
|Net cash used by financing activities                                            |  |      | (960,000   | ) |      |   | (500,000 | )    |  |   | 1,700,000  |  
|                                                                                 |  |      |            |   |      |   |          |      |  |   |            |  
|Net (decrease) in cash and due from banks                                        |  |      | (14,823    | ) |      |   | (1,822   | )    |  |   | (3,307     | )
|                                                                                 |  |      |           
|Cash and cash equivalents, beginning                                             |  |      | 48,221     |   |      |   | 50,043   |      |  |   | 53,350     |  
|                                                                                 |  |      |            |   |      |   |          |      |  |   |            |  
|Cash and cash equivalents, ending                                                |  | $    | 33,398     |   |      | $ | 48,221   |      |  | $ | 50,043     |  
|                                                                                 |  |      |            |   |      |   |          |      |  |   |            |  



35



---



Notes to
Consolidated Financial Statements





Note 21. Segment Reporting

The Company has two reportable segments, the Bank and Freedom Finance, LLC (subsidiary). The Bank provides mortgage, consumer, and commercial loans. Freedom Finance, LLC specializes in the purchase of sales finance
contracts from local automobile dealers. Information about reportable segments, and reconciliation of such information to the consolidated financial statements as of and for the years ended December 31, 2008, 2007 and 2006, is as follows:



|                              |  |      |             |                     |   |           |                         |  |   |                    |   |  |   |            
|----------------------------- |  | ---- | ----------- | ------------------- | - | --------- | ----------------------- |  | - | ------------------ | - |  | - | -----------
|                              |  | Bank |             | FreedomFinance, LLC |   |           | IntersegmentElimination |  |   | ConsolidatedTotals
|2008                          |  |      |             |                     |   |           |                         |  |   |                    |   |  |   |            
|                              |  |      |             |                    
|Net interest income           |  | $    | 6,479,931   |                     | $ | 440,538   |                         |  | $ |                   |   |  | $ | 6,920,469  
|Noninterest income            |  |      | 2,496,028   |                     |   | 2,083     |                         |  |   |                   |   |  |   | 2,498,111  
|Depreciation and amortization |  |      | 311,831     |                     |   | 2,410     |                         |  |   |                   |   |  |   | 314,241    
|Provision for loan losses     |  |      | 777,042     |                     |   | 22,871    |                         |  |   |                   |   |  |   | 799,913    
|Net income                    |  |      | 1,468,482   |                     |   | 46,083    |                         |  |   |                    |   |  |   | 1,514,565  
|Assets                        |  |      | 203,970,462 |                     |   | 1,771,090 |                         |  |   | (1,563,537         | ) |  |   | 204,178,015
|                              |  |      |             |                    
|2007                          |  |      |             |                     |   |           |                         |  |   |                    |   |  |   |            
|                              |  |      |             |                    
|Net interest income           |  | $    | 8,017,269   |                     | $ | 556,490   |                         |  | $ |                   |   |  | $ | 8,573,759  
|Noninterest income            |  |      | 2,613,431   |                     |   | 4,502     |                         |  |   |                   |   |  |   | 2,617,933  
|Depreciation and amortization |  |      | 312,328     |                     |   | 2,605     |                         |  |   |                   |   |  |   | 314,933    
|Provision for loan losses     |  |      | 432,728     |                     |   | 284,901   |                         |  |   |                   |   |  |   | 717,629    
|Net income                    |  |      | 2,846,868   |                     |   | (61,662   | )                       |  |   |                   |   |  |   | 2,785,206  
|Assets                        |  |      | 209,806,380 |                     |   | 2,675,606 |                         |  |   | (1,524,613         | ) |  |   | 210,957,373
|                              |  |      |             |                    
|2006                          |  |      |             |                     |   |           |                         |  |   |                    |   |  |   |            
|                              |  |      |             |                    
|Net interest income           |  | $    | 7,742,468   |                     | $ | 528,887   |                         |  | $ |                   |   |  | $ | 8,271,355  
|Noninterest income            |  |      | 2,042,854   |                     |   | 2,497     |                         |  |   |                   |   |  |   | 2,045,351  
|Depreciation and amortization |  |      | 340,477     |                     |   | 2,809     |                         |  |   |                   |   |  |   | 343,286    
|Provision for loan losses     |  |      | 222,347     |                     |   | 392,020   |                         |  |   |                   |   |  |   | 614,367    
|Net income                    |  |      | 2,773,603   |                     |   | (122,710  | )                       |  |   |                   |   |  |   | 2,650,893  
|Assets                        |  |      | 185,327,212 |                     |   | 3,260,834 |                         |  |   | (1,478,518         | ) |  |   | 187,109,528

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, 2008, 2007, and 2006. The Bank does allocate income
taxes to the segments. Other revenue represents noninterest income which is also allocated to the segments. The Company includes the holding company and an insurance and investment agency in its Bank segment above. The 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.



36



---



Notes to
Consolidated Financial Statements





Note 22. Parent Company Activity

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

Condensed Balance Sheets

December 31, 2008 and 2007



|                                              |  |      |            |   |      |   |           
|--------------------------------------------- |  | ---- | ---------- | - | ---- | - | ----------
|                                              |  | 2008 |            |   | 2007
|Assets                                        |  |      |            |   |      |   |           
|                                              |  |     
|Cash and due from banks                       |  | $    | 101,253    |   |      | $ | 597,957   
|Interest-bearing deposits with banks          |  |      | 1,540,000  |   |      |   | 1,065,000 
|Investment in subsidiaries                    |  |      | 22,771,139 |   |      |   | 21,269,887
|Other assets                                  |  |      | 598        |   |      |   | 554,830   
|                                              |  |      |            |   |      |   |           
|                                              |  | $    | 24,412,990 |   |      | $ | 23,487,674
|                                              |  |      |            |   |      |   |           
|                                              |  |     
|Liabilities and Capital                       |  |      |            |   |      |   |           
|                                              |  |     
|Liabilities                                   |  |      |            |   |      |   |           
|Dividends payable                             |  | $    | 29,987     |   |      | $ | 504,483   
|                                              |  |      |            |   |      |   |           
|                                              |  |     
|Capital                                       |  |      |            |   |      |   |           
|Preferred stock                               |  |      | 2,620,325  |   |      |   | 2,620,325 
|Common stock                                  |  |      | 9,270,253  |   |      |   | 9,217,939 
|Retained earnings                             |  |      | 12,493,763 |   |      |   | 11,141,839
|Accumulated other comprehensive income (loss) |  |      | (1,338     | ) |      |   | 3,088     
|                                              |  |      |            |   |      |   |           
|                                              |  |      | 24,383,003 |   |      |   | 22,983,191
|                                              |  |      |            |   |      |   |           
|                                              |  | $    | 24,412,990 |   |      | $ | 23,487,674
|                                              |  |      |            |   |      |   |           

Condensed Statements of Income

For the periods ended December 31, 2008, 2007, and 2006



|                                             |  |      |           |   |      |   |           |      |  |   |           |  
|-------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                             |  | 2008 |           |   | 2007 |   |           | 2006 | 
|Income                                       |  |      |           |   |      |   |           |      |  |   |           |  
|Equity in undistributed income of subsidiary |  | $    | 1,514,842 |   |      | $ | 2,765,315 |      |  | $ | 2,644,562 |  
|Interest income                              |  |      | 59,172    |   |      |   | 81,376    |      |  |   | 59,534    |  
|                                             |  |      |           |   |      |   |           |      |  |   |           |  
|Total income                                 |  |      | 1,574,014 |   |      |   | 2,846,691 |      |  |   | 2,704,096 |  
|                                             |  |      |           |   |      |   |           |      |  |   |           |  
|                                             |  |      |          
|Expenses                                     |  |      |           |   |      |   |           |      |  |   |           |  
|Other expense                                |  |      | 59,592    |   |      |   | 51,239    |      |  |   | 49,942    |  
|                                             |  |      |           |   |      |   |           |      |  |   |           |  
|Total expense                                |  |      | 59,592    |   |      |   | 51,239    |      |  |   | 49,942    |  
|                                             |  |      |           |   |      |   |           |      |  |   |           |  
|Income before income taxes                   |  |      | 1,514,422 |   |      |   | 2,795,452 |      |  |   | 2,654,154 |  
|Income tax expense (benefit)                 |  |      | (143      | ) |      |   | 10,246    |      |  |   | 3,261     |  
|                                             |  |      |           |   |      |   |           |      |  |   |           |  
|Net income                                   |  | $    | 1,514,565 |   |      | $ | 2,785,206 |      |  | $ | 2,650,893 |  
|Preferred stock dividends                    |  |      | (119,295  | ) |      |   | (119,295  | )    |  |   | (119,295  | )
|                                             |  |      |           |   |      |   |           |      |  |   |           |  
|Net income available to common stockholders  |  | $    | 1,395,270 |   |      | $ | 2,665,911 |      |  | $ | 2,531,598 |  
|                                             |  |      |           |   |      |   |           |      |  |   |           |  



37



---



Notes to
Consolidated Financial Statements





Note 22. Parent Company Activity, continued



Condensed Statements of Cash Flows

For the periods ended December 31, 2008, 2007, and 2006



|                                                                                |  |      |            |   |      |   |            |      |  |   |            |  
|------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                |  | 2008 |            |   | 2007 |   |            | 2006 | 
|Cash flows from operating activities                                            |  |      |            |   |      |   |            |      |  |   |            |  
|Net income                                                                      |  | $    | 1,514,565  |   |      | $ | 2,785,206  |      |  | $ | 2,650,893  |  
|Adjustment to reconcile net income to net cash provided by operating activities |  |      |           |   |      |   |           |      |  |   |           |  
|Equity in undistributed earnings of subsidiary                                  |  |      | (1,514,842 | ) |      |   | (2,765,315 | )    |  |   | (2,644,562 | )
|Net increase in other assets                                                    |  |      | 554,232    |   |      |   | (458,964   | )    |  |   | (51,063    | )
|                                                                                |  |      |            |   |      |   |            |      |  |   |            |  
|Net cash used by operating activities                                           |  |      | 553,955    |   |      |   | (439,073   | )    |  |   | (44,732    | )
|                                                                                |  |      |            |   |      |   |            |      |  |   |            |  
|                                                                                |  |      |           
|Cash flows from investing activities                                            |  |      |            |   |      |   |            |      |  |   |            |  
|Net (increase) decrease in interest-bearing deposits with banks                 |  |      | (475,000   | ) |      |   | 325,000    |      |  |   | (215,000   | )
|Loan participations (purchased) sold                                            |  |      |           |   |      |   |           |      |  |   | 195,602    |  
|                                                                                |  |      |            |   |      |   |            |      |  |   |            |  
|Net cash used in investing activities                                           |  |      | (475,000   | ) |      |   | 325,000    |      |  |   | (19,398    | )
|                                                                                |  |      |            |   |      |   |            |      |  |   |            |  
|                                                                                |  |      |           
|Cash flows from financing activities                                            |  |      |            |   |      |   |            |      |  |   |            |  
|Common stock options exercised                                                  |  |      | 18,132     |   |      |   | 186,467    |      |  |   | 129,355    |  
|Fractional shares purchased                                                     |  |      |           |   |      |   |           |      |  |   | (19,641    | )
|Tax benefit of non-employee stock option deduction                              |  |      |           |   |      |   | 565,076    |      |  |   | 99,127     |  
|Dividends paid                                                                  |  |      | (593,791   | ) |      |   | (119,295   | )    |  |   | (119,295   | )
|                                                                                |  |      |            |   |      |   |            |      |  |   |            |  
|Net cash provided by financing activities                                       |  |      | (575,659   | ) |      |   | 632,248    |      |  |   | 89,546     |  
|                                                                                |  |      |            |   |      |   |            |      |  |   |            |  
|Net increase (decrease) in cash and due from banks                              |  |      | (496,704   | ) |      |   | 518,175    |      |  |   | 25,416     |  
|                                                                                |  |      |           
|Cash and cash equivalents, beginning                                            |  |      | 597,957    |   |      |   | 79,782     |      |  |   | 54,366     |  
|                                                                                |  |      |            |   |      |   |            |      |  |   |            |  
|Cash and cash equivalents, ending                                               |  | $    | 101,253    |   |      | $ | 597,957    |      |  | $ | 79,782     |  
|                                                                                |  |      |            |   |      |   |            |      |  |   |            |  



38



---



Notes to
Consolidated Financial Statements





Note 23. Subsequent Events

Participation in U.S. Treasurys Capital Purchase Program

On January 9, 2009, the Company entered
into an agreement with the United States Department of the Treasury (Treasury). The Company issued and sold to the Treasury 2,000 shares of the Companys Fixed Rate Cumulative Perpetual Preferred Stock, Series B; with a liquidation
value of $1,000 per share; and a warrant to purchase 100.001 shares of the Companys Fixed Rate Cumulative Perpetual Preferred Stock, Series C, at an initial exercise price of $.01 per share, which was immediately exercised. The warrant has a
liquidation value of $1,000 per share. The Company received $2,000,000 in cash from the transaction. The Series B preferred stock calls for cumulative dividends at a rate of 5% per year for the first five years, and a rate of 9% per year
in following years. The Series C preferred stock pays cumulative dividends at a rate of 9% per annum. This resulted in restrictions on our ability to pay dividends on our common stock and to repurchase shares of our common stock. Unless all
accrued dividends on the Series B and Series C have been paid in full no dividends may be declared or paid on our common stock; and subject to limited exceptions, we may not repurchase any of our outstanding common stock. Additionally, until
January 9, 2012, we are required to obtain consent from the U.S. Treasury in order to declare or pay any dividends or make any distribution on our common stock unless we have redeemed all the Series B and Series C Preferred Stock or the U. S.
Treasury has transferred all of those shares to a third party.

FDIC Special Assessment

On February 27, 2009, the Board of Directors of the Federal Deposit Insurance Corporation (FDIC) voted to amend the restoration plan for the Deposit Insurance Fund.
The Board took action by imposing a special assessment on insured institutions of 20 basis points, implementing changes to the risk-based assessment system, and increased regular premiums rates for 2009, which banks must pay on top of the special
assessment. The 20 basis point special assessment on the industry will be as of June 30, 2009, payable on September 30, 2009. As a result of the special assessment and increased regular assessments, the Company projects it will experience
an increase in FDIC assessment expense of approximately $438,000 from 2008 to 2009. The 20 basis point assessment represents $346,000 of this increase.

Proceeds from Life Insurance

During February 2009, Freedom Finance, LLC. (subsidiary) received death proceeds from life insurance in
the amount of $1,000,000 on the life of its former partner. The proceeds are tax-exempt and will be reported in non-interest income in the first quarter of 2009.



39



---

LOGO

Report of Independent Registered Public Accounting Firm

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, 2008 and 2007, and the related consolidated statements of income, stockholders equity, and cash flows for each of the three years in the period ended December 31, 2008. These
consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 the Surrey Bancorp and
subsidiaries as of December 31, 2008 and 2007 and the results of its operations and its cash flows for each of the three years then ended, in conformity with U.S. generally accepted accounting principles.



|               
|---------------
|LOGO           
|               
|Galax, Virginia
|March 17, 2009 

LOGO



---



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 Surry County, NC and Patrick County, VA 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, consumer and mortgage loans; safe deposit boxes; and other associated services. Through its subsidiaries, Surrey Investment Services, Inc. and Freedom 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 73,000 people. Mount Airy is served by Interstate Highways 77 and 74 and U.S. Highways 52
and 601. Surry County has a civilian labor force of over 35,000. Major industries include manufacturing, construction, 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-K for the year ended December 31, 2008, 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
Banks investment in the loan.



41



---



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 uses 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 environmental factors, industry or geographic sectors whose impact on the portfolio have occurred but have yet to be
recognized in either the formula or specific allowance.

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

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). Changes in the volume and mix of earning assets and interest-bearing liabilities, as well
as their respective yields and rates, have a significant impact on the level of net interest income. Changes in the interest rate environment and the Companys cost of funds also affect net interest income. Table 1 summarizes the major
components of net interest income for the years ended December 31, 2008 and 2007 and 2006.



|                                             |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |        |                |      |   |                        |   |            |   |  |   |        |  |      |  
|-------------------------------------------- |  | -------------------------- | ------- | - | ---------------------- | - | ---------- | ---- | ---- | -------------- |  | - | ---------------------- | - | ---------- | - | ------ | -------------- | ---- | - | ---------------------- | - | ---------- | - |  | - | ------ |  | ---- | -
|                                             |  | Periods Ended December 31, |        
|                                             |  | 2008                       |         |   | 2007                   |   |            | 2006 |     
|                                             |  | AverageBalance             |         |   | InterestIncome/Expense |   | Yield/Cost |      |      | AverageBalance |  |   | InterestIncome/Expense |   | Yield/Cost |   |        | AverageBalance |      |   | InterestIncome/Expense |   | Yield/Cost |  
|Interest-earning assets                      |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |        |                |      |   |                        |   |            |   |  |   |        |  |      |  
|Deposits in other banks                      |  | $                          | 18,129  |   |                        | $ | 298        |      | 1.65 | %              |  | $ | 23,268                 |   |            | $ | 994    |                | 4.27 | % |                        | $ | 18,798     |   |  | $ | 738    |  | 3.92 | %
|Taxable investment securities                |  |                            | 3,582   |   |                        |   | 139        |      | 3.86 | %              |  |   | 4,152                  |   |            |   | 213    |                | 5.13 | % |                        |   | 4,523      |   |  |   | 207    |  | 4.57 | %
|Non-taxable investments                      |  |                            |        |   |                        |   |           |      |     | %              |  |   |                       |   |            |   |       |                |     | % |                        |   |           |   |  |   |       |  |     | %
|Federal funds sold                           |  |                            | 357     |   |                        |   | 7          |      | 2.00 | %              |  |   | 408                    |   |            |   | 20     |                | 4.99 | % |                        |   | 407        |   |  |   | 20     |  | 4.87 | %
|Loans                                        |  |                            | 171,799 |   |                        |   | 11,912     |      | 6.93 | %              |  |   | 160,289                |   |            |   | 13,797 |                | 8.61 | % |                        |   | 147,362    |   |  |   | 12,487 |  | 8.47 | %
|                                             |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |        |                |      |   |                        |   |            |   |  |   |        |  |      |  
|Total interest-earning assets                |  |                            | 193,867 |   |                        |   | 12,356     |      |      |                |  |   | 188,117                |   |            |   | 15,024 |                |      |   |                        |   | 171,090    |   |  |   | 13,452 |  |      |  
|                                             |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |        |                |      |   |                        |   |            |   |  |   |        |  |      |  
|Yield on average interest-earning assets     |  |                            |         |   |                        |   |            |      | 6.37 | %              |  |   |                        |   |            |   |        |                | 7.99 | % |                        |   |            |   |  |   |        |  | 7.86 | %
|                                             |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |        |                |      |   |                        |   |            |   |  |   |        |  |      |  
|                                             |  |                            |         |   |                        |   |            |      |     
|Noninterest-earning assets                   |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |        |                |      |   |                        |   |            |   |  |   |        |  |      |  
|Cash and due from banks                      |  |                            | 1,503   |   |                        |   |            |      |      |                |  |   | 1,564                  |   |            |   |        |                |      |   |                        |   | 1,641      |   |  |   |        |  |      |  
|Property and equipment                       |  |                            | 5,104   |   |                        |   |            |      |      |                |  |   | 4,622                  |   |            |   |        |                |      |   |                        |   | 4,517      |   |  |   |        |  |      |  
|Foreclosed assets                            |  |                            | 46      |   |                        |   |            |      |      |                |  |   | 112                    |   |            |   |        |                |      |   |                        |   | 43         |   |  |   |        |  |      |  
|Interest receivable and other                |  |                            | 5,905   |   |                        |   |            |      |      |                |  |   | 5,722                  |   |            |   |        |                |      |   |                        |   | 5,323      |   |  |   |        |  |      |  
|Allowance for loan losses                    |  |                            | (2,959  | ) |                        |   |            |      |      |                |  |   | (2,568                 | ) |            |   |        |                |      |   |                        |   | (2,427     | ) |  |   |        |  |      |  
|                                             |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |        |                |      |   |                        |   |            |   |  |   |        |  |      |  
|Total noninterest-earning assets             |  |                            | 9,599   |   |                        |   |            |      |      |                |  |   | 9,452                  |   |            |   |        |                |      |   |                        |   | 9,097      |   |  |   |        |  |      |  
|                                             |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |        |                |      |   |                        |   |            |   |  |   |        |  |      |  
|Total assets                                 |  | $                          | 203,466 |   |                        |   |            |      |      |                |  | $ | 197,569                |   |            |   |        |                |      |   |                        | $ | 180,187    |   |  |   |        |  |      |  
|                                             |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |        |                |      |   |                        |   |            |   |  |   |        |  |      |  
|                                             |  |                            |         |   |                        |   |            |      |     
|Interest-bearing liabilities                 |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |        |                |      |   |                        |   |            |   |  |   |        |  |      |  
|Demand deposits                              |  | $                          | 18,934  |   |                        | $ | 296        |      | 1.56 | %              |  | $ | 17,825                 |   |            | $ | 490    |                | 2.75 | % |                        | $ | 18,243     |   |  | $ | 463    |  | 2.54 | %
|Savings deposits                             |  |                            | 18,835  |   |                        |   | 365        |      | 1.94 | %              |  |   | 16,803                 |   |            |   | 527    |                | 3.13 | % |                        |   | 15,625     |   |  |   | 430    |  | 2.75 | %
|Time deposits                                |  |                            | 100,608 |   |                        |   | 4,188      |      | 4.16 | %              |  |   | 96,889                 |   |            |   | 4,750  |                | 4.90 | % |                        |   | 84,876     |   |  |   | 3,617  |  | 4.26 | %
|Fed funds sold/Repurchase agreements         |  |                            | 443     |   |                        |   | 7          |      | 1.51 | %              |  |   | 697                    |   |            |   | 30     |                | 4.39 | % |                        |   | 726        |   |  |   | 30     |  | 4.13 | %
|Short-term debt                              |  |                            | 256     |   |                        |   | 12         |      | 4.48 | %              |  |   |                       |   |            |   |       |                |     | % |                        |   | 356        |   |  |   | 28     |  | 7.86 | %
|Long-term debt                               |  |                            | 13,186  |   |                        |   | 568        |      | 4.30 | %              |  |   | 14,266                 |   |            |   | 653    |                | 4.58 | % |                        |   | 14,291     |   |  |   | 613    |  | 4.29 | %
|                                             |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |        |                |      |   |                        |   |            |   |  |   |        |  |      |  
|Total interest-bearing liabilities           |  |                            | 152,262 |   |                        |   | 5,436      |      |      |                |  |   | 146,480                |   |            |   | 6,450  |                |      |   |                        |   | 134,117    |   |  |   | 5,181  |  |      |  
|                                             |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |        |                |      |   |                        |   |            |   |  |   |        |  |      |  
|Cost of average interest bearing liabilities |  |                            |         |   |                        |   |            |      | 3.57 | %              |  |   |                        |   |            |   |        |                | 4.40 | % |                        |   |            |   |  |   |        |  | 3.86 | %
|                                             |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |        |                |      |   |                        |   |            |   |  |   |        |  |      |  
|                                             |  |                            |         |   |                        |   |            |      |     
|Noninterest-bearing liabilities              |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |        |                |      |   |                        |   |            |   |  |   |        |  |      |  
|Demand deposits                              |  |                            | 25,398  |   |                        |   |            |      |      |                |  |   | 27,142                 |   |            |   |        |                |      |   |                        |   | 25,700     |   |  |   |        |  |      |  
|Interest payable and other                   |  |                            | 2,004   |   |                        |   |            |      |      |                |  |   | 1,843                  |   |            |   |        |                |      |   |                        |   | 1,643      |   |  |   |        |  |      |  
|                                             |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |        |                |      |   |                        |   |            |   |  |   |        |  |      |  
|Total noninterest-bearing liabilities        |  |                            | 27,402  |   |                        |   |            |      |      |                |  |   | 28,985                 |   |            |   |        |                |      |   |                        |   | 27,343     |   |  |   |        |  |      |  
|                                             |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |        |                |      |   |                        |   |            |   |  |   |        |  |      |  
|Total liabilities                            |  |                            | 179,664 |   |                        |   |            |      |      |                |  |   | 175,465                |   |            |   |        |                |      |   |                        |   | 161,460    |   |  |   |        |  |      |  
|Minority interest                            |  |                            |        |   |                        |   |            |      |      |                |  |   |                       |   |            |   |        |                |      |   |                        |   |           |   |  |   |        |  |      |  
|Stockholders equity                         |  |                            | 23,802  |   |                        |   |            |      |      |                |  |   | 22,104                 |   |            |   |        |                |      |   |                        |   | 18,727     |   |  |   |        |  |      |  
|                                             |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |        |                |      |   |                        |   |            |   |  |   |        |  |      |  
|Total liabilities and stockholders equity   |  | $                          | 203,466 |   |                        |   |            |      |      |                |  | $ | 197,569                |   |            |   |        |                |      |   |                        | $ | 180,187    |   |  |   |        |  |      |  
|                                             |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |        |                |      |   |                        |   |            |   |  |   |        |  |      |  
|Net interest income                          |  |                            |         |   |                        | $ | 6,920      |      |      |                |  |   |                        |   |            | $ | 8,574  |                |      |   |                        |   |            |   |  | $ | 8,271  |  |      |  
|                                             |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |        |                |      |   |                        |   |            |   |  |   |        |  |      |  
|Net yield on interest-earning assets         |  |                            |         |   |                        |   |            |      | 3.57 | %              |  |   |                        |   |            |   |        |                | 4.56 | % |                        |   |            |   |  |   |        |  | 4.83 | %
|                                             |  |                            |         |   |                        |   |            |      |      |                |  |   |                        |   |            |   |        |                |      |   |                        |   |            |   |  |   |        |  |      |  



42



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Managements Discussion and Analysis





Compared to 2007, yields on interest-earning assets decreased during the year ended December 31, 2008, due to
the steep decline in interest rates over the year ending 2008 compared to 2007. The cost of interest bearing liabilities also decreased in 2008 due to the general decline in interest rates. Because of the Companys asset sensitivity (interest
earning assets repriced more rapidly than interest-bearing liabilities) and the competition for retail deposits the net yield on interest earning assets decreased from 4.56% to 3.57% during the year ended December 31, 2008.

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



|                                               |  |                                |        |   |                       |   |        |                    |  |   |                                |   |  |              |       |   |                    |   |      |   |  |   |       |  
|---------------------------------------------- |  | ------------------------------ | ------ | - | --------------------- | - | ------ | ------------------ |  | - | ------------------------------ | - |  | ------------ | ----- | - | ------------------ | - | ---- | - |  | - | ----- | -
|                                               |  | 2008 Compared to 2007          |        |   | 2007 Compared to 2006 |  
|                                               |  | InterestIncome/ExpenseVariance |        |   | VarianceRate          |   |        | AttributedToVolume |  |   | InterestIncome/ExpenseVariance |   |  | VarianceRate |       |   | AttributedToVolume |  
|Interest-earning assets                        |  |                                |        |   |                       |   |        |                    |  |   |                                |   |  |              |       |   |                    |   |      |   |  |   |       |  
|Deposits in other banks                        |  | $                              | (696   | ) |                       | $ | (513   | )                  |  | $ | (183                           | ) |  | $            | 256   |   |                    | $ | 69   |   |  | $ | 187   |  
|Taxable investments securities                 |  |                                | (74    | ) |                       |   | (47    | )                  |  |   | (27                            | ) |  |              | 6     |   |                    |   | 19   |   |  |   | (13   | )
|Non taxable securities                         |  |                                |       |   |                       |   |       |                    |  |   |                               |   |  |              |      |   |                    |   |     |   |  |   |      |  
|Federal funds sold                             |  |                                | (13    | ) |                       |   | (11    | )                  |  |   | (2                             | ) |  |              | 1     |   |                    |   | 1    |   |  |   |      |  
|Loans                                          |  |                                | (1,885 | ) |                       |   | (2,988 | )                  |  |   | 1,103                          |   |  |              | 1,309 |   |                    |   | 199  |   |  |   | 1,110 |  
|                                               |  |                                |        |   |                       |   |        |                    |  |   |                                |   |  |              |       |   |                    |   |      |   |  |   |       |  
|Total                                          |  |                                | (2,668 | ) |                       |   | (3,559 | )                  |  |   | 891                            |   |  |              | 1,572 |   |                    |   | 288  |   |  |   | 1,284 |  
|                                               |  |                                |        |   |                       |   |        |                    |  |   |                                |   |  |              |       |   |                    |   |      |   |  |   |       |  
|Interest-bearing liabilities                   |  |                                |        |   |                       |   |        |                    |  |   |                                |   |  |              |       |   |                    |   |      |   |  |   |       |  
|Demand deposits                                |  |                                | (194   | ) |                       |   | (223   | )                  |  |   | 29                             |   |  |              | 27    |   |                    |   | 38   |   |  |   | (11   | )
|Savings deposits                               |  |                                | (162   | ) |                       |   | (220   | )                  |  |   | 58                             |   |  |              | 96    |   |                    |   | 69   |   |  |   | 27    |  
|Time deposits                                  |  |                                | (562   | ) |                       |   | (753   | )                  |  |   | 191                            |   |  |              | 1,133 |   |                    |   | 583  |   |  |   | 550   |  
|Federal funds purchased/ Repurchase agreements |  |                                | (23    | ) |                       |   | (14    | )                  |  |   | (9                             | ) |  |              | 1     |   |                    |   | 2    |   |  |   | (1    | )
|Short-term debt                                |  |                                | 12     |   |                       |   |       |                    |  |   | 12                             |   |  |              | (28   | ) |                    |   |     |   |  |   | (28   | )
|Long-term debt                                 |  |                                | (85    | ) |                       |   | 418    |                    |  |   | (503                           | ) |  |              | 40    |   |                    |   | 41   |   |  |   | (1    | )
|                                               |  |                                |        |   |                       |   |        |                    |  |   |                                |   |  |              |       |   |                    |   |      |   |  |   |       |  
|Total                                          |  |                                | (1,014 | ) |                       |   | (792   | )                  |  |   | (222                           | ) |  |              | 1,269 |   |                    |   | 733  |   |  |   | 536   |  
|                                               |  |                                |        |   |                       |   |        |                    |  |   |                                |   |  |              |       |   |                    |   |      |   |  |   |       |  
|Net interest income                            |  | $                              | (1,654 | ) |                       | $ | (2,767 | )                  |  | $ | 1,113                          |   |  | $            | 303   |   |                    | $ | (445 | ) |  | $ | 748   |  
|                                               |  |                                |        |   |                       |   |        |                    |  |   |                                |   |  |              |       |   |                    |   |      |   |  |   |       |  

As discussed above, the Companys net interest income is affected by the change in the amount and mix of
interest-earning assets and interest-bearing liabilities (referred to as volume change) as well as by changes in yields earned on interest-earning assets and rates paid on deposits and borrowed funds (referred to as rate
change). The table above presents, for the periods indicated, a summary of changes in interest income and interest expense for the major categories of interest-earning assets and interest-bearing liabilities and the amounts of change
attributable to variations in volumes and rates. Changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and rate, respectively.

Provision for Loan Losses

The allowance for loan 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 loan losses required to maintain an allowance
adequate to provide for probable losses. Generally, the factors which management of the Company considers in determining the appropriate level of the allowance for loan losses are an evaluation of the current loan portfolio, identified impaired
loans, loan volume outstanding, outstanding loan mix, overall Company leverage, past loss experience, present and expected industry and economic conditions, and in particular, how such conditions relate to the Companys market area. The overall
allowance is then reviewed not only for adequacy but for appropriateness based on managements assessment of inherent risk associated with the loan portfolio.



43



---



Managements Discussion and Analysis





Provision for Loan Losses, continued



A provision for loan losses of $799,913 was made during 2008, an increase of $82,284 or 11.5% from the $717,629
provided during 2007, in recognition of our estimate of inherent risk associated with lending activities and growth in the loan portfolio. A provision for loan losses of $717,629 was made in 2007, an increase of $103,262, or 16.8% from the $614,367
provided during 2006. Approximately 3%, 40% and 64% of the provision recorded in 2008, 2007 and 2006, respectively, was associated with our finance subsidiary, Freedom Finance, LLC. The subsidiarys outstanding loan balances have decreased 45%
from 2006 to 2008 due to a weakening economy. Significant charge-offs were experienced during 2007 and 2006.

The allowance for loan losses was $3,365,370,
or 1.92% of total loans outstanding at December 31, 2008. This compares to an allowance for loan losses of $2,781,565, or 1.64% of total loans outstanding at December 31, 2007, which compares to an allowance for loan losses of $2,531,305,
or 1.62% of total loans outstanding at December 31, 2006. The significant increase in the reserve, as a percentage of total loans in 2008, was due to the weakening economy and its effects on credit quality and collateral values. This
necessitated an increase in reserves associated with impaired loans in 2008. Reserves on impaired loans increased from approximately $188,000 at December 31, 2007 to $756,000 at the end of 2008. The weak economy also adversely affected the
environmental factors associated with determining an appropriate loan loss reserve.

Management regularly reviews asset quality and re-evaluates the
allowance for loan losses. However, no assurance can be given as to unforeseen adverse economic conditions or other circumstances that will result in increased provisions in the future. Additionally, regulatory examiners may require the Company to
recognize additions to the allowance based upon their judgment about the loan portfolio and other information available to them at the time of their examinations.

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 service charges on deposit accounts, including charges for insufficient funds; fees charged for non-deposit services and fees and yield spread premiums on mortgage loans delivered to correspondents.

Table 3 discloses noninterest income for the periods ended December 31, 2008, 2007 and 2006.

Table 3. Sources of Noninterest Income



|                                                                    |  |                                   |           |      |   |           |  |   |          
|------------------------------------------------------------------- |  | --------------------------------- | --------- | ---- | - | --------- |  | - | ---------
|                                                                    |  | For the period ended December 31,
|                                                                    |  | 2008                              |           | 2007 |   | 2006     
|Service charges on deposit accounts                                 |  | $                                 | 1,153,707 |      | $ | 1,125,212 |  | $ | 1,019,993
|Fees on mortgage loans delivered to correspondents                  |  |                                   | 71,218    |      |   | 119,404   |  |   | 132,280  
|Yield spread premiums on mortgage loans delivered to correspondents |  |                                   | 65,098    |      |   | 90,318    |  |   | 110,727  
|Other service charges and fees                                      |  |                                   | 368,678   |      |   | 340,914   |  |   | 200,558  
|Other income                                                        |  |                                   | 839,410   |      |   | 794,245   |  |   | 554,205  
|Gain on sale of government guaranteed loans                         |  |                                   |          |      |   | 147,840   |  |   | 27,588   
|                                                                    |  |                                   |           |      |   |           |  |   |          
|                                                                    |  | $                                 | 2,498,111 |      | $ | 2,617,933 |  | $ | 2,045,351
|                                                                    |  |                                   |           |      |   |           |  |   |          

Activity in the deposit related noninterest income accounts increased in 2008 primarily due to insufficient funds
fees. Activity in mortgage lending decreased in 2008, as economic conditions worsened; resulting in a decrease in fees and yield spread premiums for mortgage loans delivered to correspondents. Other service charges and fees increased primarily due
to increases in servicing fee income and debit card and merchant fee income. Other income made gains in 2008 as subsidiary operations continued to increased revenue. Insurance and investment revenues were up collectively 7.0% in 2008, to $635,266
from $593,536 in 2007.

During 2005, the Bank entered into a program to sell the guaranteed portions of SBA and USDA guaranteed loans into the secondary
market. These loans are originated and held in the Banks portfolio in the normal course of business. The gains recognized on these sales in 2007 and 2006, amounted to $147,840 and $27,588, respectively. There were no sales of guaranteed loans
in 2008 and there were no loans held for sale as of December 31, 2008. However, the Bank plans to continue to originate guaranteed loans as portfolio loans and as loans held for sale.



44



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Managements Discussion and Analysis





Other Expense

The major components of other expense for the periods ended December 31, 2008, 2007, and 2006 are as follows:

Table 4. Sources of
Noninterest Expense



|                                   |  |                                   |           |      |   |           |  |   |          
|---------------------------------- |  | --------------------------------- | --------- | ---- | - | --------- |  | - | ---------
|                                   |  | For the period ended December 31,
|                                   |  | 2008                              |           | 2007 |   | 2006     
|Salary and benefits                |  | $                                 | 3,207,384 |      | $ | 3,063,889 |  | $ | 2,855,605
|Occupancy expenses                 |  |                                   | 410,489   |      |   | 374,945   |  |   | 377,561  
|Furniture/equipment expenses       |  |                                   | 322,824   |      |   | 330,094   |  |   | 336,903  
|Data processing                    |  |                                   | 365,017   |      |   | 379,042   |  |   | 355,698  
|Foreclosed assets, net             |  |                                   | 43,260    |      |   | 44,367    |  |   | 324      
|Postage/printing and supplies      |  |                                   | 229,841   |      |   | 215,313   |  |   | 229,822  
|Advertising and business promotion |  |                                   | 132,453   |      |   | 124,307   |  |   | 138,170  
|Professional fees                  |  |                                   | 251,747   |      |   | 311,513   |  |   | 163,182  
|Other expenses                     |  |                                   | 1,316,371 |      |   | 1,276,500 |  |   | 1,132,827
|                                   |  |                                   |           |      |   |           |  |   |          
|                                   |  | $                                 | 6,279,386 |      | $ | 6,119,970 |  | $ | 5,590,092
|                                   |  |                                   |           |      |   |           |  |   |          

The overhead ratio of noninterest expense to adjusted total revenue (net interest income plus noninterest income)
increased from 54.7% in 2007 to 66.7% for the year ended December 31, 2008. The increase is attributable to the general decline in interest rates over the year and the resultant tightening of the net interest margin. Salaries and employee
benefits of $3,207,384 increased $143,495 or 4.7% over the 2007 total of $3,063,889. This increase is primarily due to normal salary increases and adjustments. Occupancy and equipment expenses increased in 2008 primarily due to the opening of the
permanent branch in Stuart Virginia. Data processing expense decreased 3.7% to $365,017 due to increased efficiencies in processing. Other noninterest expenses, represented in the table above as postage, advertising, professional fees and other
expenses, increased to $1,930,412 in 2008, a 0.1% increase over the 2007 total of $1,927,633. Postage increased due to an increase in mailing rates. Advertising grew modestly, increasing 6.5% in 2008. Professional fees decreased due to reduced cost
associated with independent loan credit reviews and efficiencies related to the second year of the Companys Sarbanes Oxley 404 compliance. Other expenses increased primarily due to increased FDIC insurance assessments.

Analysis of Financial Condition

Average earning assets have
increased 3.1% from December 31, 2007, to December 31, 2008. Total earning assets represented 95.28% of total average assets at December 31, 2008 compared to 95.22% at the end of 2007. The mix of average earning assets changed
significantly from December 31, 2007, to December 31, 2008. The most notable change in the mix of average earning assets was the increase in net loans and the corresponding decrease in interest-bearing bank balances. This migration results
from a 7.2% increase in average loans in 2008, while average deposits increased only 3.0%. As a result a large portion of the average loan funding in 2008 came from existing interest-bearing bank balances versus deposit growth.



45



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Managements Discussion and Analysis





Table 5. Average Asset Mix



|                               |  |                                     |             |   |                                     |        |    |                |   |             |   |  |        |   
|------------------------------ |  | ----------------------------------- | ----------- | - | ----------------------------------- | ------ | -- | -------------- | - | ----------- | - |  | ------ | --
|                               |  | For the Year EndedDecember 31, 2008 |             |   | For the Year EndedDecember 31, 2007 |       
|                               |  | AverageBalance                      |             |   | %                                   |        |    | AverageBalance |   |             | % | 
|Earning assets                 |  |                                     |             |   |                                     |        |    |                |   |             |   |  |        |   
|Loans, net                     |  | $                                   | 171,798,699 |   |                                     | 84.44  | %  |                | $ | 160,288,308 |   |  | 81.13  | % 
|Investment securities          |  |                                     | 3,582,580   |   |                                     | 1.76   | %  |                |   | 4,151,905   |   |  | 2.10   | % 
|Federal funds sold             |  |                                     | 356,751     |   |                                     | 0.17   | %  |                |   | 408,090     |   |  | 0.21   | % 
|Interest-bearing bank balances |  |                                     | 18,128,652  |   |                                     | 8.91   | %  |                |   | 23,268,381  |   |  | 11.78  | % 
|                               |  |                                     |             |   |                                     |        |    |                |   |             |   |  |        |   
|Total earning assets           |  |                                     | 193,866,682 |   |                                     | 95.28  | %  |                |   | 188,116,684 |   |  | 95.22  | % 
|                               |  |                                     |             |   |                                     |        |    |                |   |             |   |  |        |   
|                               |  |                                     |             |  
|Nonearning assets              |  |                                     |             |   |                                     |        |    |                |   |             |   |  |        |   
|Cash and due from banks        |  |                                     | 1,503,016   |   |                                     | 0.74   | %  |                |   | 1,563,503   |   |  | 0.78   | % 
|Property and equipment         |  |                                     | 5,103,882   |   |                                     | 2.51   | %  |                |   | 4,622,280   |   |  | 2.34   | % 
|Foreclosed assets              |  |                                     | 46,354      |   |                                     | 0.02   | %  |                |   | 111,905     |   |  | 0.06   | % 
|Other assets                   |  |                                     | 5,904,928   |   |                                     | 2.90   | %  |                |   | 5,722,226   |   |  | 2.90   | % 
|Allowance for loan losses      |  |                                     | (2,958,736  | ) |                                     | (1.45  | )% |                |   | (2,567,938  | ) |  | (1.30  | )%
|                               |  |                                     |             |   |                                     |        |    |                |   |             |   |  |        |   
|Total nonearning assets        |  |                                     | 9,599,444   |   |                                     | 4.72   | %  |                |   | 9,451,976   |   |  | 4.78   | % 
|                               |  |                                     |             |   |                                     |        |    |                |   |             |   |  |        |   
|Total assets                   |  | $                                   | 203,466,126 |   |                                     | 100.00 | %  |                | $ | 197,568,660 |   |  | 100.00 | % 
|                               |  |                                     |             |   |                                     |        |    |                |   |             |   |  |        |   

At December 31, 2008, average net loans represented 84.44% of total average assets compared to 81.13% at the
end of 2007. Investments decreased from 2.10% of average assets to 1.76% of average assets over the same time period. Interest-bearing bank balances decreased over the period from 11.78% to 8.91% of average assets. Although there was an increase in
total earning assets as a percentage of total average assets in 2008, a reduction in the average prime rate of approximately 296 basis points in 2008 under that of 2007 resulted in a decrease in the net yield on interest earning assets as shown in
Table 1. The biggest increase in nonearning assets in 2008 was in property and equipment. This is the result of the construction and completion of our permanent Stuart, Virginia branch. The largest single item in other assets relates to the
Banks investment in Bank Owned Life Insurance (BOLI). Even though the BOLI does produce income its revenue is classified as other non-interest income and therefore is grouped with nonearning assets in the table above.

Loans

Average net loans totaled $171,798,699 for the year ended
December 31, 2008. This represents an increase of 7.18% over the average net loans for 2007. Loan demand remained relatively strong in 2008 although general economic conditions weakened.

The loan portfolio is dominated by real estate and commercial loans. These loans make up 93.78% of the total loan portfolio at December 31, 2008. This is up
slightly from the 93.31% that the two categories maintained at December 31, 2007. The amount of loans outstanding by type at December 31, 2008, and December 31, 2007, and the maturity distribution for variable and fixed rate loans as
of December 31, 2008 are presented in Tables 6 & 7, respectively.



46



---



Managements Discussion and Analysis





Loans, continued



Table 6. Loan Portfolio Summary



|                             |  |                   |             |   |                   |   |        |   |             |  |        |  
|---------------------------- |  | ----------------- | ----------- | - | ----------------- | - | ------ | - | ----------- |  | ------ | -
|                             |  | December 31, 2008 |             |   | December 31, 2007 |  
|                             |  | Amount            |             | % |                   |   | Amount |   | %           | 
|Construction and development |  | $                 | 4,123,370   |   | 2.35              | % |        | $ | 4,149,219   |  | 2.45   | %
|1-4 family residential       |  |                   | 35,582,692  |   | 20.28             | % |        |   | 35,064,796  |  | 20.72  | %
|Farmland                     |  |                   | 256,698     |   | 0.15              | % |        |   | 307,586     |  | 0.18   | %
|Nonfarm, nonresidential      |  |                   | 2,420,716   |   | 1.38              | % |        |   | 570,276     |  | 0.34   | %
|                             |  |                   |             |   |                   |   |        |   |             |  |        |  
|Total real estate            |  |                   | 42,383,476  |   | 24.16             | % |        |   | 40,091,877  |  | 23.69  | %
|                             |  |                   |             |  
|Agricultural                 |  |                   | 63,574      |   | 0.04              | % |        |   | 89,914      |  | 0.05   | %
|Commercial and industrial    |  |                   | 122,125,641 |   | 69.62             | % |        |   | 117,802,940 |  | 69.62  | %
|Consumer                     |  |                   | 10,723,046  |   | 6.11              | % |        |   | 10,945,019  |  | 6.47   | %
|Other                        |  |                   | 123,386     |   | 0.07              | % |        |   | 295,290     |  | 0.17   | %
|                             |  |                   |             |   |                   |   |        |   |             |  |        |  
|Total                        |  | $                 | 175,419,123 |   | 100.00            | % |        | $ | 169,225,040 |  | 100.00 | %
|                             |  |                   |             |   |                   |   |        |   |             |  |        |  

Table 7. Maturity Schedule of Loans



|                                   |  |                                     |             |             |   |            |  |       |            |  |   |             |  |        |  
|---------------------------------- |  | ----------------------------------- | ----------- | ----------- | - | ---------- |  | ----- | ---------- |  | - | ----------- |  | ------ | -
|                                   |  | CommercialFinancial andAgricultural |             | Real Estate |   | Others     |  | Total |           
|                                   |  |                                     |             | Amount      |   | %          | 
|Fixed rate loans                   |  |                                     |             |             |   |            |  |       |            |  |   |             |  |        |  
|Three months or less               |  | $                                   | 7,123,576   |             | $ | 779,700    |  | $     | 1,809,206  |  | $ | 9,712,482   |  | 5.54   | %
|Over three months to twelve months |  |                                     | 25,025,413  |             |   | 3,701,787  |  |       | 2,270,183  |  |   | 30,997,383  |  | 17.67  | %
|Over one year to five years        |  |                                     | 33,995,922  |             |   | 12,811,904 |  |       | 5,459,331  |  |   | 52,267,157  |  | 29.79  | %
|Over five years                    |  |                                     | 21,218,819  |             |   | 8,945,343  |  |       | 227,596    |  |   | 30,391,758  |  | 17.33  | %
|                                   |  |                                     |             |             |   |            |  |       |            |  |   |             |  |        |  
|Total fixed rate loans             |  | $                                   | 87,363,730  |             | $ | 26,238,734 |  | $     | 9,766,316  |  | $ | 123,368,780 |  | 70.33  | %
|                                   |  |                                     |             |             |   |            |  |       |            |  |   |             |  |        |  
|                                   |  |                                     |             |             |  
|Variable rate loans                |  |                                     |             |             |   |            |  |       |            |  |   |             |  |        |  
|Three months or less               |  | $                                   | 2,536,746   |             | $ | 15,853,363 |  | $     | 684,301    |  | $ | 19,074,410  |  | 10.87  | %
|Over three months to twelve months |  |                                     | 5,116,230   |             |   | 117,000    |  |       | 311,316    |  |   | 5,544,546   |  | 3.16   | %
|Over one year to five years        |  |                                     | 7,980,535   |             |   |           |  |       |           |  |   | 7,980,535   |  | 4.55   | %
|Over five years                    |  |                                     | 19,191,974  |             |   | 174,379    |  |       | 84,499     |  |   | 19,450,852  |  | 11.09  | %
|                                   |  |                                     |             |             |   |            |  |       |            |  |   |             |  |        |  
|Total variable rate loans          |  | $                                   | 34,825,485  |             | $ | 16,144,742 |  | $     | 1,080,116  |  | $ | 52,050,343  |  | 29.67  | %
|                                   |  |                                     |             |             |   |            |  |       |            |  |   |             |  |        |  
|                                   |  |                                     |             |             |  
|Total loans                        |  |                                     |             |             |   |            |  |       |            |  |   |             |  |        |  
|Three months or less               |  | $                                   | 9,660,322   |             | $ | 16,633,063 |  | $     | 2,493,507  |  | $ | 28,786,892  |  | 16.41  | %
|Over three months to twelve months |  |                                     | 30,141,643  |             |   | 3,818,787  |  |       | 2,581,499  |  |   | 36,541,929  |  | 20.83  | %
|Over one year to five years        |  |                                     | 41,976,457  |             |   | 12,811,904 |  |       | 5,459,331  |  |   | 60,247,692  |  | 34.33  | %
|Over five years                    |  |                                     | 40,410,793  |             |   | 9,119,722  |  |       | 312,095    |  |   | 49,842,610  |  | 28.42  | %
|                                   |  |                                     |             |             |   |            |  |       |            |  |   |             |  |        |  
|Total loans                        |  | $                                   | 122,189,215 |             | $ | 42,383,476 |  | $     | 10,846,432 |  | $ | 175,419,123 |  | 100.00 | %
|                                   |  |                                     |             |             |   |            |  |       |            |  |   |             |  |        |  



47



---



Managements Discussion and Analysis





Loans, continued



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 6.93% for the year ended December 31, 2008, compared to an average yield of 8.61% in 2007. The lower average prime
rate during 2008 compared to 2007, lead to the decrease in yields. Commercial loans remained constant as a percentage of average loans remaining at 69.62% at December 31, 2008, the same as 2007. Total real estate loans increased from 23.69% of
total loans at December 31, 2007, to 24.16% of total loans at December 31, 2008. Consumer loans fell to 6.11% of total loans at December 31, 2008, from 6.47% at December 31, 2007. This decrease was attributable to a decrease in
consumer loans in Freedom Finance, LLC. Loans in the subsidiary decreased $802,280 or 30.99% from December 31, 2007 to December 31, 2008.

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 Government-sponsored enterprises 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, 2008 and 2007 by major type of investments and maturity ranges.

The general turnover of Government-sponsored enterprises and the investment in adjustable-rate Mortgage-backed Securities, which adjust annually, caused the average yield of the investment portfolio to decrease to
3.86% for the year ended December 31, 2008, compared to 5.13% for 2007. At December 31, 2008 the market value of the investment portfolio was $3,208,246, representing a $2,178 depreciation of book value. At December 31, 2007, the
market value of the investment portfolio was $5,026 above book value.

Table 8. Investment Securities

December 31, 2008, Available for Sale and Restricted



|                                             |  |                    |           |   |                           |   |           |                            |  |   |               |   |  |   |        |   |             |   |           |   |  |   |          
|-------------------------------------------- |  | ------------------ | --------- | - | ------------------------- | - | --------- | -------------------------- |  | - | ------------- | - |  | - | ------ | - | ----------- | - | --------- | - |  | - | ---------
|                                             |  | In One Yearor Less |           |   | One YearThroughFive Years |   |           | After FiveThroughTen Years |  |   | AfterTenYears |   |  |   |        |   | MarketValue
|                                             |  |                    |           |   | Total                     |   |          
|Investment securities                        |  |                    |           |   |                           |   |           |                            |  |   |               |   |  |   |        |   |             |   |           |   |  |   |          
|Government-sponsored enterprises             |  | $                  |          |   |                           | $ | 1,512,503 |                            |  | $ |              |   |  | $ |       |   |             | $ | 1,512,503 |   |  | $ | 1,534,060
|Government-sponsored enterprises pools (MBS) |  |                    |          |   |                           |   |          |                            |  |   | 41,829        |   |  |   | 58,628 |   |             |   | 100,457   |   |  |   | 99,767   
|Municipal securities                         |  |                    |          |   |                           |   |          |                            |  |   |              |   |  |   |       |   |             |   |          |   |  |   |         
|Corporate securities                         |  |                    |          |   |                           |   |          |                            |  |   | 550,000       |   |  |   |       |   |             |   | 550,000   |   |  |   | 526,955  
|Restricted                                   |  |                    | 1,047,464 |   |                           |   |          |                            |  |   |              |   |  |   |       |   |             |   | 1,047,464 |   |  |   | 1,047,464
|                                             |  |                    |           |   |                           |   |           |                            |  |   |               |   |  |   |        |   |             |   |           |   |  |   |          
|Total                                        |  | $                  | 1,047,464 |   |                           | $ | 1,512,503 |                            |  | $ | 591,829       |   |  | $ | 58,628 |   |             | $ | 3,210,424 |   |  | $ | 3,208,246
|                                             |  |                    |           |   |                           |   |           |                            |  |   |               |   |  |   |        |   |             |   |           |   |  |   |          
|                                             |  |                    |           |   |                           |  
|Weighted average yields                      |  |                    |           |   |                           |   |           |                            |  |   |               |   |  |   |        |   |             |   |           |   |  |   |          
|Government-sponsored enterprises             |  |                    |          | % |                           |   | 3.25      | %                          |  |   |              | % |  |   |       | % |             |   | 3.25      | % |  |   |          
|Government-sponsored enterprises pools (MBS) |  |                    |          | % |                           |   |          | %                          |  |   | 5.03          | % |  |   | 4.96   | % |             |   | 4.99      | % |  |   |          
|Municipal securities                         |  |                    |          | % |                           |   |          | %                          |  |   |              | % |  |   |       | % |             |   |          | % |  |   |          
|Corporate securities                         |  |                    |          | % |                           |   |          | %                          |  |   | 5.64          | % |  |   |       | % |             |   | 5.64      | % |  |   |          
|Restricted                                   |  |                    | 1.02      | % |                           |   |          | %                          |  |   |              | % |  |   |       | % |             |   | 1.02      | % |  |   |          
|                                             |  |                    |           |   |                           |   |           |                            |  |   |               |   |  |   |        |   |             |   |           |   |  |   |          
|Consolidated                                 |  |                    | 1.02      | % |                           |   | 3.25      | %                          |  |   | 5.60          | % |  |   | 4.96   | % |             |   | 2.99      | % |  |   |          
|                                             |  |                    |           |   |                           |   |           |                            |  |   |               |   |  |   |        |   |             |   |           |   |  |   |          



48



---



Managements Discussion and Analysis





Table 8. Investment Securities, continued



December 31, 2007, Available for Sale and Restricted



|                                             |  |                    |           |   |                           |   |           |                            |  |   |               |   |  |   |        |   |             |   |           |   |  |   |          
|-------------------------------------------- |  | ------------------ | --------- | - | ------------------------- | - | --------- | -------------------------- |  | - | ------------- | - |  | - | ------ | - | ----------- | - | --------- | - |  | - | ---------
|                                             |  | In One Yearor Less |           |   | One YearThroughFive Years |   |           | After FiveThroughTen Years |  |   | AfterTenYears |   |  |   |        |   | MarketValue
|                                             |  |                    |           |   | Total                     |   |          
|Investment securities                        |  |                    |           |   |                           |   |           |                            |  |   |               |   |  |   |        |   |             |   |           |   |  |   |          
|Government-sponsored enterprises             |  | $                  | 1,996,111 |   |                           | $ | 1,000,000 |                            |  | $ |              |   |  | $ |       |   |             | $ | 2,996,111 |   |  | $ | 3,000,500
|Government-sponsored enterprises pools (MBS) |  |                    |          |   |                           |   |          |                            |  |   | 23,193        |   |  |   | 94,003 |   |             |   | 117,196   |   |  |   | 117,833  
|Municipal securities                         |  |                    |          |   |                           |   |          |                            |  |   |              |   |  |   |       |   |             |   |          |   |  |   |         
|Restricted                                   |  |                    | 994,014   |   |                           |   |          |                            |  |   |              |   |  |   |       |   |             |   | 994,014   |   |  |   | 994,014  
|                                             |  |                    |           |   |                           |   |           |                            |  |   |               |   |  |   |        |   |             |   |           |   |  |   |          
|Total                                        |  | $                  | 2,990,125 |   |                           | $ | 1,000,000 |                            |  | $ | 23,193        |   |  | $ | 94,003 |   |             | $ | 4,107,321 |   |  | $ | 4,112,347
|                                             |  |                    |           |   |                           |   |           |                            |  |   |               |   |  |   |        |   |             |   |           |   |  |   |          
|                                             |  |                    |           |   |                           |  
|Weighted average yields                      |  |                    |           |   |                           |   |           |                            |  |   |               |   |  |   |        |   |             |   |           |   |  |   |          
|Government-sponsored enterprises             |  |                    | 4.72      | % |                           |   | 4.94      | %                          |  |   |              | % |  |   |       | % |             |   | 4.79      | % |  |   |          
|Government-sponsored enterprises pools (MBS) |  |                    |          | % |                           |   |          | %                          |  |   | 6.13          | % |  |   | 6.00   | % |             |   | 6.03      | % |  |   |          
|Municipal securities                         |  |                    |          | % |                           |   |          | %                          |  |   |              | % |  |   |       | % |             |   |          | % |  |   |          
|Restricted                                   |  |                    | 5.75      | % |                           |   |          | %                          |  |   |              | % |  |   |       | % |             |   | 5.75      | % |  |   |          
|                                             |  |                    |           |   |                           |   |           |                            |  |   |               |   |  |   |        |   |             |   |           |   |  |   |          
|Consolidated                                 |  |                    | 5.06      | % |                           |   | 4.94      | %                          |  |   | 6.13          | % |  |   | 6.00   | % |             |   | 5.06      | % |  |   |          
|                                             |  |                    |           |   |                           |   |           |                            |  |   |               |   |  |   |        |   |             |   |           |   |  |   |          

Average federal funds sold totaled $356,751 for the year ended December 31, 2008, which was down from the
2007 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 and Silverton Bank, which pay an overnight rate on those deposits. These rates usually mirror 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. Large average demand deposit balances also make it necessary to retain funds in more liquid investments. During the year ended December 31,
2008, average federal funds and deposits in other banks represented 0.17% and 8.91% of average assets, respectively. This compares to 0.21% and 11.78% in 2007, 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.



49



---



Managements Discussion and Analysis





Deposits, continued



Average deposits for the year ended December 31, 2008, amounted to $164,139,243 which was an increase of
$4,783,247, or 3.0% over 2007. Average core deposits totaled $127,193,672 for the year ended December 31, 2008, an increase of $5,177,296, or 4.2% over 2007. The percentage of the Banks average deposits that are interest bearing increased
to 84.53% for the year ended December 31, 2008, from 82.98% in 2007. Average demand deposits, which earn no interest, decreased 6.4% from $27,142,464 in 2007 to $25,398,158 in 2008. Average deposits for the periods ended December 31, 2008,
and December 31, 2007 are summarized in Table 9 below:

Table 9. Deposit Mix



|                                |  |                   |             |   |                   |   |                |   |             |  |        |  
|------------------------------- |  | ----------------- | ----------- | - | ----------------- | - | -------------- | - | ----------- |  | ------ | -
|                                |  | December 31, 2008 |             |   | December 31, 2007 |  
|                                |  | AverageBalance    |             | % |                   |   | AverageBalance |   | %           | 
|Interest-bearing deposits       |  |                   |             |   |                   |   |                |   |             |  |        |  
|NOW Accounts                    |  | $                 | 18,933,674  |   | 11.54             | % |                | $ | 17,824,404  |  | 11.19  | %
|Money Market                    |  |                   | 13,629,090  |   | 8.30              | % |                |   | 11,770,668  |  | 7.39   | %
|Savings                         |  |                   | 5,205,818   |   | 3.17              | % |                |   | 5,032,319   |  | 3.16   | %
|Small denomination certificates |  |                   | 63,662,113  |   | 38.79             | % |                |   | 59,549,741  |  | 37.37  | %
|Large denomination certificates |  |                   | 36,945,571  |   | 22.51             | % |                |   | 37,339,620  |  | 23.43  | %
|Repurchase agreements           |  |                   | 364,819     |   | 0.22              | % |                |   | 696,780     |  | 0.44   | %
|                                |  |                   |             |   |                   |   |                |   |             |  |        |  
|Total interest-bearing deposits |  |                   | 138,741,085 |   | 84.53             | % |                |   | 132,213,532 |  | 82.98  | %
|                                |  |                   |             |  
|Noninterest-bearing deposits    |  |                   | 25,398,158  |   | 15.47             | % |                |   | 27,142,464  |  | 17.02  | %
|                                |  |                   |             |   |                   |   |                |   |             |  |        |  
|Total deposits                  |  | $                 | 164,139,243 |   | 100.00            | % |                | $ | 159,355,996 |  | 100.00 | %
|                                |  |                   |             |   |                   |   |                |   |             |  |        |  

The average balance of certificates of deposit issued in denominations of $100,000 or more decreased by $394,049,
or 1.1% for the year ended December 31, 2008. 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. Due to the
high local rates paid on large denomination certificates of deposit in 2008, the Bank funded a portion of its liquidity needs with brokered certificates of deposit. These deposits are typically below $100,000 and are not considered core deposits.
The average balance in brokered certificates of deposit in 2008 amounted to $2,597,239. Table 10 provides maturity information relating to certificates of deposit of $100,000 or more at December 31, 2008.

Table 10. Large Time Deposit Maturities



|                                                                    |  |   |           
|------------------------------------------------------------------- |  | - | ----------
|Analysis of time deposits of $100,000 or more at December 31, 2008: |  |   |           
|Remaining maturity of three months or less                          |  | $ | 12,914,742
|Remaining maturity over three through twelve months                 |  |   | 16,504,037
|Remaining maturity over twelve months                               |  |   | 3,336,247 
|                                                                    |  |   |           
|Total time deposits of $100,000 or more                             |  | $ | 32,755,026
|                                                                    |  |   |           

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 2008, the Bank had short-term borrowings of $3,884,186, made up of $1,500,000 of short-term FHLB advances at a rate of 1.08%, $2,000,000 in fed funds purchased at a rate of 2.0%, $144,186 in
repurchase agreements at a rate of zero, and $240,000 advanced on a revolving line of credit with a commercial bank, proceeds of which are to fund the purchase of sales finance contracts by Freedom Finance, LLC. The rate on this line at
December 31, 2008 was 3.90%. This line was renewed in June 2008 at which time its term was reduced from two years to one year. In previous years the line has been classified as long-term debt. Long-term debt consists of fixed, variable and
convertible rate advances from the FHLB. The average rate paid on this short-term debt for the year ended December 31, 2008 and 2007 was 2.60% and 4.39%, respectively. The average interest rate paid on long-term debt for the year ended
December 31, 2008 and 2007, was 4.30% and 4.58%, respectively.



50



---



Managements Discussion and Analysis





Capital Adequacy

Stockholders equity amounted to $24,383,003 at December 31, 2008, a 6.1% increase over the 2007 year-end total of $22,983,191. Average stockholders equity as a percentage of average total assets amounted to 11.70% for the
year ended December 31, 2008, and 11.19% in 2007.

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, 2008, the Bank has a ratio of Tier 1 capital to risk-weighted assets of 12.54% and a ratio of total capital to risk-weighted assets of 13.80%. All capital ratio levels
indicate that the Bank is well capitalized.

At December 31, 2008, the Company had 3,167,568 shares of common stock outstanding, which were held by
approximately 1,600 stockholders of record. Stock options for 4,804 shares of common stock were exercised in 2008.

Additionally, the Company had 189,356
shares of Series A 4.5% Convertible Non-Cumulative Perpetual Preferred Stock outstanding at December 31, 2008. The shares have a liquidation value of $14 per share. The shares were issued in a private placement and are held by approximately 49
stockholders of record. The shares are non-voting and convertible into 2.0868 shares of common stock.

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, 2008 and 2007 are analyzed in Table 11.

Table 11. Nonperforming Assets



|                                          |  |      |         |      |   |        
|----------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                          |  | 2008 |         | 2007
|Nonaccrual loans                          |  | $    | 544,061 |      | $ | 350,141
|Loans past due 90 days and still accruing |  |      | 36,725  |      |   | 49,001 
|Foreclosed assets                         |  |      | 50,414  |      |   | 88,840 
|                                          |  |      |         |      |   |        
|                                          |  | $    | 631,200 |      | $ | 487,982
|                                          |  |      |         |      |   |        

Nonaccrual loans were 0.31% and 0.21% of outstanding loans at December 31, 2008 and 2007, respectively.

Loan 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 0.13% and 0.29% in 2008 and 2007, respectively.

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



51



---



Managements Discussion and Analysis





Table 12. Loan Losses



|                                                      |  |              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|----------------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                      |  | December 31, |        
|                                                      |  | 2008         |         |   | 2007 |   |         | 2006 |  |   | 2005    |   |  | 2004 |        
|Balance at January 1                                  |  | $            | 2,782   |   |      | $ | 2,531   |      |  | $ | 2,311   |   |  | $    | 2,294   |   |  | $ | 2,109   |  
|                                                      |  |              |         |   |     
|Recoveries                                            |  |              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Commercial                                            |  |              | 15      |   |      |   | 5       |      |  |   | 82      |   |  |      | 3       |   |  |   |        |  
|Loans to individuals                                  |  |              | 26      |   |      |   | 46      |      |  |   | 37      |   |  |      | 215     |   |  |   | 19      |  
|                                                      |  |              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total recoveries                                      |  |              | 41      |   |      |   | 51      |      |  |   | 119     |   |  |      | 218     |   |  |   | 19      |  
|                                                      |  |              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                      |  |              |         |   |     
|Charged-off loans                                     |  |              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Commercial                                            |  |              | (46     | ) |      |   | (26     | )    |  |   | (151    | ) |  |      | (106    | ) |  |   | (17     | )
|Loans to individuals                                  |  |              | (212    | ) |      |   | (492    | )    |  |   | (362    | ) |  |      | (556    | ) |  |   | (142    | )
|                                                      |  |              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total charge-off loans                                |  |              | (258    | ) |      |   | (518    | )    |  |   | (513    | ) |  |      | (662    | ) |  |   | (159    | )
|                                                      |  |              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                      |  |              |         |   |     
|Net charge-offs                                       |  |              | (217    | ) |      |   | (467    | )    |  |   | (394    | ) |  |      | (444    | ) |  |   | (140    | )
|Provision for loan losses                             |  |              | 800     |   |      |   | 718     |      |  |   | 614     |   |  |      | 461     |   |  |   | 325     |  
|                                                      |  |              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                      |  |              |         |   |     
|Balance at December 31                                |  | $            | 3,365   |   |      | $ | 2,782   |      |  | $ | 2,531   |   |  | $    | 2,311   |   |  | $ | 2,294   |  
|                                                      |  |              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                      |  |              |         |   |     
|Total loans outstanding                               |  | $            | 175,446 |   |      | $ | 169,238 |      |  | $ | 156,383 |   |  | $    | 144,696 |   |  | $ | 135,340 |  
|                                                      |  |              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                      |  |              |         |   |     
|Average outstanding loans during period               |  | $            | 171,799 |   |      | $ | 160,289 |      |  | $ | 147,362 |   |  | $    | 142,384 |   |  | $ | 127,726 |  
|                                                      |  |              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                      |  |              |         |   |     
|Allowance for loan losses to loans outstanding        |  |              | 1.92    | % |      |   | 1.64    | %    |  |   | 1.62    | % |  |      | 1.60    | % |  |   | 1.69    | %
|                                                      |  |              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|                                                      |  |              |         |   |     
|Ratio of net charge-offs to average loans outstanding |  |              | 0.13    | % |      |   | 0.29    | %    |  |   | 0.27    | % |  |      | 0.31    | % |  |   | 0.11    | %
|                                                      |  |              |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  

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 Home Loan 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 11.81% at December 31, 2008, compared to 19.03% at December 31, 2007. The liquidity ratio at December 31, 2008 is considered adequate by management.



52



---



Managements Discussion and Analysis





Liquidity and Sensitivity, continued



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, 2008, 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 to three month and four to twelve month 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.

Table 13.
Interest Rate Sensitivity



|                                                              |  |                              |            |   |              |   |             |               |  |   |               |   |  |       |            |   |  |   |             |  
|------------------------------------------------------------- |  | ---------------------------- | ---------- | - | ------------ | - | ----------- | ------------- |  | - | ------------- | - |  | ----- | ---------- | - |  | - | ----------- | -
|                                                              |  | December 31, 2008 Maturities |           
|                                                              |  | 1 - 3Months                  |            |   | 4 - 12Months |   |             | 13 - 60Months |  |   | Over 60Months |   |  | Total |           
|Earning Assets                                                |  |                              |            |   |              |   |             |               |  |   |               |   |  |       |            |   |  |   |             |  
|Loans                                                         |  | $                            | 68,906,460 |   |              | $ | 24,440,049  |               |  | $ | 55,238,191    |   |  | $     | 26,834,423 |   |  | $ | 175,419,123 |  
|Investments                                                   |  |                              | 568,311    |   |              |   | 58,411      |               |  |   | 1,534,060     |   |  |       |           |   |  |   | 2,160,782   |  
|Interest-bearing balances with banks                          |  |                              | 16,503,318 |   |              |   |            |               |  |   |              |   |  |       |           |   |  |   | 16,503,318  |  
|Federal funds sold                                            |  |                              | 200,000    |   |              |   |            |               |  |   |              |   |  |       |           |   |  |   | 200,000     |  
|                                                              |  |                              |            |   |              |   |             |               |  |   |               |   |  |       |            |   |  |   |             |  
|Total                                                         |  | $                            | 86,178,089 |   |              | $ | 24,498,460  |               |  | $ | 56,772,251    |   |  | $     | 26,834,423 |   |  | $ | 194,283,223 |  
|                                                              |  |                              |            |   |              |   |             |               |  |   |               |   |  |       |            |   |  |   |             |  
|                                                              |  |                              |            |   |             
|Interest-bearing deposits                                     |  |                              |            |   |              |   |             |               |  |   |               |   |  |       |            |   |  |   |             |  
|NOW accounts                                                  |  | $                            | 20,508,191 |   |              | $ |            |               |  | $ |              |   |  | $     |           |   |  | $ | 20,508,191  |  
|Money market                                                  |  |                              | 15,001,672 |   |              |   |            |               |  |   |              |   |  |       |           |   |  |   | 15,001,672  |  
|Savings                                                       |  |                              | 5,484,085  |   |              |   |            |               |  |   |              |   |  |       |           |   |  |   | 5,484,085   |  
|Certificates of deposit                                       |  |                              | 51,963,854 |   |              |   | 38,512,015  |               |  |   | 8,116,210     |   |  |       |           |   |  |   | 98,592,079  |  
|Repurchase agreements/federal funds purchased                 |  |                              | 2,144,186  |   |              |   |            |               |  |   |              |   |  |       |           |   |  |   | 2,144,186   |  
|Short-term debt                                               |  |                              |           |   |              |   |            |               |  |   |              |   |  |       |           |   |  |   |            |  
|Long-term debt                                                |  |                              | 750,000    |   |              |   | 3,990,000   |               |  |   | 7,700,000     |   |  |       |           |   |  |   | 12,440,000  |  
|                                                              |  |                              |            |   |              |   |             |               |  |   |               |   |  |       |            |   |  |   |             |  
|Total                                                         |  | $                            | 95,851,988 |   |              | $ | 42,502,015  |               |  | $ | 15,816,210    |   |  | $     |           |   |  | $ | 154,170,213 |  
|                                                              |  |                              |            |   |              |   |             |               |  |   |               |   |  |       |            |   |  |   |             |  
|                                                              |  |                              |            |   |             
|Interest sensitivity gap                                      |  | $                            | (9,673,899 | ) |              | $ | (18,003,555 | )             |  | $ | 40,956,041    |   |  | $     | 26,834,423 |   |  | $ |            |  
|Cumulative interest sensitivity gap                           |  | $                            | (9,673,899 | ) |              | $ | (27,677,454 | )             |  | $ | 13,278,587    |   |  | $     | 40,113,010 |   |  | $ | 40,113,010  |  
|Ratio of sensitive assets to sensitive liabilities            |  |                              | 89.91      | % |              |   | 57.64       | %             |  |   | 358.95        | % |  |       |           | % |  |   | 126.02      | %
|Cumulative ratio of sensitive assets to sensitive liabilities |  |                              | 89.91      | % |              |   | 80.00       | %             |  |   | 108.61        | % |  |       | 126.02     | % |  |   | 126.02      | %

Table 14. Key Financial Ratios



|                                 |  |                  |   |  |                  |  
|-------------------------------- |  | ---------------- | - |  | ---------------- | -
|                                 |  | December 31,2008 |   |  | December 31,2007 |  
|Return on average assets         |  | 0.74             | % |  | 1.41             | %
|Return on average equity         |  | 6.36             | % |  | 12.60            | %
|Average equity to average assets |  | 11.70            | % |  | 11.19            | %



53



---



Board of
Directors and Officers



Board of Directors



|                         |  |                                              
|------------------------ |  | ---------------------------------------------
|                         | 
|Edward C. Ashby, III     |  | Surrey Bank & Trust                          
|                         | 
|William A. Johnson       |  | J. G. Coram Company, Inc.                    
|                         | 
|Elizabeth Johnson Lovill |  | Town and Country Builders of Mount Airy, Inc.
|                         | 
|Robert H. Moody          |  | Moody Funeral Services, Inc.                 
|                         | 
|Gene Rees                |  | F. Rees Company, Inc.                        
|                         | 
|Tom G. Webb              |  | Araneum, LLC                                 
|                         | 
|Buddy Williams           |  | Ten Oaks, LLC                                
|                         | 
|Hylton Wright            |  | Retired                                      

Bank Officers



|                     |  |                                         
|-------------------- |  | ----------------------------------------
|                     | 
|Hylton Wright        |  | Chairman                                
|                     | 
|Edward C. 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                          
|                     | 
|Lesa Hensley         |  | Vice President                          



54



---



Stockholder
Information



Annual Meeting

The annual meeting of stockholders will be held Tuesday, April 28, 2009, 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
Companys Form 10-K for 2008 will be furnished, without charge, after March 31, 2009, upon written request, or will be available on the internet at www.surreybank.com.



|                             |  |                              
|---------------------------- |  | -----------------------------
|Independent Auditors         |  | Stock Transfer Agent         
|                             | 
|Elliott Davis, PLLC          |  | 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                              |  | 940 Woodland Drive                                
|Mount Airy, North Carolina                         |  | Mount Airy, North Carolina                         |  | Stuart Virginia                                   
|(336) 783-3900                                     |  | (336) 783-3920                                     |  | (276) 694-4825                                    
|                                                   |  |                                                   
|2050 Rockford Street Mount Airy, North Carolina    |  |                                                    |  | 653 South Key StreetPilot Mountain, North
Carolina
|(336) 783-3940                                     |  |                                                    |  | (336) 368-1122                                    
|                                                   |  |                                                   
|                                                   |  | Mortgage Lending Office                            |  |                                                   
|                                                   |  |                                                   
|                                                   |  | 199 North Renfro Street Mount Airy, North Carolina |  |                                                   
|                                                   |  | (336) 783-3933                                     |  |                                                   
|                                                   |  |                                                   
|Freedom Finance, LLC                               |  | SB & T Insurance                                   |  | Surrey Investment Services, Inc.                  
|                                                   |  |                                                   
|165 North Renfro Street Mount Airy, North Carolina |  | 199 North Renfro Street Mount Airy, North Carolina |  | 145 North Renfro StreetMount Airy, North
Carolina 
|(336) 783-3980                                     |  | (336) 783-3939                                     |  | (336) 783-3938                                    



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