---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities

Exchange Act of 1934

 

Filed by the Registrant       ☒

Filed by a Party other than the Registrant       ☐

 

Check the appropriate box:

☒	Preliminary Proxy Statement

☐	Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

☐	Definitive Proxy Statement

☐	Definitive Additional Materials

☐	Soliciting Material Pursuant to Section 240.14a-12

SURREY BANCORP

(Name of Registrant as Specified in its Charter)

(Name of Person(s) Filing Proxy Statement if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

☒	No fee required

☐	Fee computed on the table below per Exchange Act Rules 14a-6(i)(1) and 0-11

 

 

---

 

☐	Fee paid previously with preliminary materials.

☐	Check box if any part of the fee is offset as provided by Exchange Act Rule

0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

(1)

Amount Previously Paid:_____________________

(2)

Form, Schedule or Registration Statement No:__________________

(3)

Filing Party:______________________________

(4)

Date Filed:_______________________________

 

---

[Preliminary Copy Dated March 17, 2016]

Surrey Bancorp

145 North Renfro Street

Mount Airy, North Carolina 27030

(336) 783-3900

Dear Fellow Shareholders:

Accompanying this letter is a proxy package from Surrey Bancorp (the “Company”). In addition to voting to elect directors and ratify the appointment of our independent registered accounting firm, you are being asked to vote to amend the Company’s Articles of Incorporation. The amendment is necessary to allow the Company to realize substantial expense savings by de-registering its Common Stock with the Securities and Exchange Commission (“SEC”) in a transaction made possible via the passage of the Jumpstart Our Businesses Startups Act (“JOBS Act”).

The JOBS Act included a provision that increases the number of shareholders of record a corporation may have without being required to register with the SEC. The Company is currently registered with the SEC. As an SEC registrant, it must meet many of the same audit and reporting requirements as the largest corporations in the nation. In order to realize the savings made possible by the JOBS Act, which we estimate to be approximately $170,000 per year, the Company must reduce the number of common shareholders of record to less than 1,200. To accomplish this goal, the Board of Directors is proposing that a portion of the shares of Company’s Common Stock be reclassified from Common Stock to Class A Common Stock or repurchased for $12.75 per share, at the election of the relevant shareholders. The shares proposed to be reclassified or repurchased will be those held by shareholders having less than 300 shares on the date that we consummate this reclassification. (The shares reclassified as Class A Common Stock will comprise less than 2.9% of the total shares of Common Stock currently outstanding.) A primary difference between the Common Stock and the Class A Common Stock will be that Class A Common Stock will have limited voting rights. Additionally, holders of Class A Common Stock will receive a premium on all dividends declared on the Common Stock of $0.03 per share.

With shareholder approval of the recommended amendment (which is described in more detail in the attached Proxy Statement), the Company will be eligible to begin a process to deregister with the SEC. As a non-registered company, the financial information available will not contain the same detail as that of an SEC registrant. However, all shareholders will continue to receive an annually audited financial statement and you will receive a quarterly financial summary in addition to the quarterly shareholder’s letter you now receive.

 

While it is not possible to provide all of the pros and cons of deregistration in this introductory letter, our Board of Directors has reviewed both the positive and negative attributes of the stock reclassification and SEC deregistration, and those are summarized thoroughly in the attached Proxy Statement. The Board has determined that it is in the Company’s best interest to approve the amendment so that the financial benefits provided by the JOBS Act will be available to the Company.

We encourage you to carefully review the proxy package accompanying this letter and urge you to promptly complete and return the proxy card included with your package. If you are a record shareholder you may also vote your shares over the Internet. If you should have any questions about the Proxy Statement or the reclassification transaction, please call us at (336) 783-3900.

Thank you for your continued support of Surrey Bancorp and Surrey Bank & Trust.

 

Sincerely,

Notice to holders of shares of Preferred Stock:  Holders of shares of the Company’s Preferred Stock are not entitled to vote on any of the proposals to be voted on at the Annual Meeting. The proxy package is being provided to you for information purposes only.

 

SURREY BANCORP

145 North Renfro Street

Mount Airy, North Carolina 27030

A LETTER TO OUR SHAREHOLDERS

____________, 2016

Dear Fellow Shareholder:

You are cordially invited to attend the Annual Meeting of Shareholders of Surrey Bancorp (the “Company”) to be held at 10:00 a.m., local time, on _____________, 2016, at the Cross Creek Country Club, 1129 Greenhill Road, Mount Airy, North Carolina.

At this important meeting, you will be asked to vote on the following matters:

1.

To approve an amendment to our Articles of Incorporation (the “Amendment”) to provide for the authorization of a new class of capital stock, Class A Common Stock, to reclassify certain of our shares of Common Stock as Class A Common Stock or to repurchase such shares for $12.75 per share, at the election of the relevant shareholders, for the purpose of discontinuing the registration of our Common Stock under the Securities Exchange Act of 1934, as amended (the “Reclassification”);

2.

To elect seven directors to serve a one year term until the Annual Meeting of Shareholders in 2017 or until their successors shall have been elected and qualified;

3.

To ratify the appointment of Elliott Davis Decosimo, PLLC as our Company’s independent registered accounting firm for the year ending December 31, 2016;

 

4.

To grant to the proxy holders discretionary authority to vote to adjourn the Annual Meeting, if necessary or appropriate, in order to solicit additional proxies in favor of any of the proposals; and

 

5.

To transact such other business as may properly come before the Annual Meeting or any adjournments thereof.

Pursuant to the proposed Amendment to authorize a new class of capital stock, shares of our existing Common Stock held by shareholders who own less than 300 shares will be reclassified as shares of Class A Common Stock or repurchased at a price of $12.75 per share, at the election of each individual shareholder holding less than 300 shares. Shares of our Common Stock held by shareholders who own 300 shares or more will not be impacted by this proposal. The Reclassification will be made on the basis of one share of Class A Common Stock for each share of Common Stock held on the date of the Reclassification. In the alternative, shareholders holding less than 300 shares of Common Stock may elect to receive $12.75 per share for their shares of Common Stock rather than having those shares reclassified as shares of Class A Common Stock. The purpose of the Amendment and the Reclassification is to discontinue the registration of our Common Stock under the Securities Exchange Act of 1934, as amended, and to cease to be a “public” company.

 

If approved at the Annual Meeting, the Amendment and Reclassification will affect you as follows:

If you have transferred your shares of our Common Stock into a brokerage or custodial account, you are no longer shown on our shareholder records as the record holder of these shares. Instead, the brokerage firms or custodians typically hold all shares of our Common Stock that their clients have deposited with them through a single nominee; this is what is meant by “street name.” If that single nominee is the record shareholder for 300 or more shares, then the shares registered in that nominee’s name will be completely unaffected by the Reclassification.

 

Our smaller shareholders who believe neither the one-for-one exchange ratio of their shares of Common Stock into Class A Common Stock nor $12.75 per share is acceptable or fair to them, or otherwise prefer to remain holders of Common Stock after the Reclassification, may elect to do so by (i) acquiring a sufficient number of shares so that they hold of record at least 300 shares of Common Stock immediately prior to the Reclassification or (ii) transferring their shares into a brokerage or custodial account that holds the shares through a single nominee that holds of record at least 300 shares of Common Stock immediately prior to the Reclassification.

The primary effect of the Reclassification will be to reduce our total number of record holders of Common Stock to below 1,200. As a result, we will terminate the registration of our Common Stock under the federal securities laws and will no longer be considered a “public” company. This transaction is known as a Rule 13e-3 “going private” transaction under the Securities Exchange Act of 1934, as amended.

We are proposing the Amendment and Reclassification because our Board of Directors has concluded, after careful consideration, that the costs and other disadvantages associated with being a reporting company with the Securities and Exchange Commission (“SEC”), outweigh any advantages.

Set forth below are what our Board believes to be the disadvantages and advantages of remaining a public reporting company:

Disadvantages of Remaining Public

·

It is an administrative burden on our management to continue making required filings with the SEC;

·

the cost to us of making required filings with the SEC is significant, including the requirement that portions of our annual and quarterly filings with the SEC be tagged in Extensible Business Reporting Language (“XBRL”) format;

·

the cost of complying with Section 404 of the Sarbanes-Oxley Act, including the requirement that our independent registered public accounting firm audit our internal control over financial reporting, is similarly high;

·

our legal and accounting costs will be significantly higher if we remain a public reporting company; and

·

we have not needed or realized many of the benefits normally associated with being a public reporting company, such as access to capital markets and an active trading market for our shares of Common Stock.

Advantages of Remaining Public

·

Our shareholders will have more convenient access to more analytical information regarding our financial performance;

·

our shareholders will have more convenient access to detailed information regarding the compensation we pay to our directors and executive officers and the changes in beneficial ownership of our Common Stock owned by our directors and officers;

 

·

we will not incur the costs of this “going private” transaction, which we expect to be approximately $70,000;

·

if we needed to raise additional capital through the issuance of Common Stock, it might be easier to do so if we were a public reporting company; and

·

if we were to acquire another bank, being a public reporting company might enhance our ability to use our Common Stock as consideration.

In reaching the conclusion to recommend that our shareholders approve the Reclassification, our Board of Directors considered the following:

·

the ongoing administrative burden and expense of making our periodic filings with the SEC;

·

the fact that operating as a non-SEC reporting company will reduce the burden on our management and employees which arises from monitoring and complying with increasingly complex SEC reporting requirements, thus allowing management to focus more of its attention on our customers and the community in which we operate;

·

the very limited trading volume of our Common Stock and the resulting lack of an active market for our shareholders;

·

the fact that a “going private” transaction could be structured in a manner whereby all of our shareholders may retain an equity interest in our Company, and would not be forced out by means of a cash reverse stock split or other transaction;

·

the estimated expense of a “going private” transaction;

·

the fact that the Reclassification allows us to discontinue our reporting obligations with the SEC, while still allowing those shareholders receiving shares of Class A Common Stock to retain an equity interest in our Company with what the Board believes is approximately the same value per share as holders of Common Stock;

·

the fact that our earnings have historically been sufficient to support our growth without the need to raise capital through the capital markets; and

·

the fact that our holding company structure now allows us to raise additional capital for our bank subsidiary through borrowing money at the holding company level, which would not dilute the ownership interest of our shareholders.

Except for the effects described in the accompanying Proxy Statement, we do not expect the Reclassification to adversely affect our operations.

 

In the event the proposal to approve the Amendment and to effect the Reclassification is approved and you elect to have your shares of Common Stock reclassified as shares of Class A Common Stock:

·

you will receive no additional consideration for your shares of Common Stock when they are reclassified as shares of Class A Common Stock;

·

you will hold shares that may be less liquid than the shares you currently hold since there is no existing market for the Class A Common Stock, and the Class A Common Stock will have fewer record holders than currently hold Common Stock; however we intend to maintain lists of willing sellers and buyers of Class A Common Stock, just as we currently do for our Common Stock;

·

you will receive a security with limited voting rights. Under North Carolina law, holders of Class A Common Stock will generally be entitled to vote as a separate voting group on proposals that will affect the Class A Common Stock, including transactions that will result in a change of control of the Company by merger, share exchange or otherwise;

·

holders of our Common Stock will not be entitled to receive dividends unless dividends are paid on our shares of Class A Common Stock; and

·

all of our shareholders will lose the benefits of holding securities registered under Section 12 of the Securities Exchange Act of 1934, as amended, including the ongoing shareholder disclosures required thereby.

In the event you elect to have your shares repurchased for $12.75 per share, you will cease to be a shareholder of the Company with respect to those shares.

Our Board of Directors believes the terms of the Amendment and the Reclassification are procedurally and substantively fair to our shareholders, including our affiliated and unaffiliated shareholders, whether you will retain your existing shares of Common Stock or receive either shares of Class A Common Stock or $12.75 per share for your shares of Common Stock, and are in the best interest of our shareholders. The Board of Directors unanimously recommends that you vote FOR the proposal to approve the Amendment and effect the Reclassification. We encourage you to read carefully the Proxy Statement and attached appendices.

It is important that your shares of Common Stock are represented at the Annual Meeting, whether or not you attend the meeting in person and regardless of the number of shares you own. To make sure your shares are represented, we urge you to complete and mail the enclosed proxy card. If you are a record shareholder you may also vote your shares over the Internet. If you attend the Annual Meeting, you may vote in person even if you have previously mailed a proxy card or voted over the Internet.

On behalf of our Board of Directors, we would like to express our appreciation for your continued support of the Company.

 

Sincerely,

Surrey Bancorp

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THE AMENDMENT OR THE RECLASSIFICATION, PASSED UPON THE MERITS OR FAIRNESS OF THE AMENDMENT OR THE RECLASSIFICATION OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE DISCLOSURE IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

Notice to holders of shares of Preferred Stock:  Holders of shares of the Company’s Preferred Stock are not entitled to vote on any of the proposals to be voted on at the Annual Meeting. The proxy package is being provided to you for information purposes only.

 

SURREY BANCORP

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

Notice is hereby given that the Annual Meeting of Shareholders of Surrey Bancorp (the “Company”) will be held at 10:00 a.m. local time, on ___________, 2016, at the Cross Creek Country Club, 1129 Greenhill Road, Mount Airy, North Carolina, for the following purposes:

1.

To approve an amendment to our Articles of Incorporation (the “Amendment”) to provide for the authorization of a new class of capital stock, Class A Common Stock, to reclassify certain of our shares of Common Stock as Class A Common Stock or to repurchase such shares for $12.75 per share, at the election of the relevant shareholders, for the purpose of discontinuing the registration of our Common Stock under the Securities Exchange Act of 1934, as amended (the “Reclassification”);

2.

To elect seven directors to serve a one year term until the Annual Meeting of Shareholders in 2017 or until their successors shall have been elected and qualified;

3.

To ratify the appointment of Elliott Davis Decosimo, PLLC as our Company’s independent registered accounting firm for the year ending December 31, 2016;

 

4.

To grant to the proxy holders discretionary authority to vote to adjourn the Annual Meeting, if necessary or appropriate, in order to solicit additional proxies in favor of any of the proposals; and

 

5.

To transact such other business as may properly come before the Annual Meeting or any adjournments thereof.

Any action may be taken on the foregoing proposals at the Annual Meeting on the date specified above or on any date or dates to which, by original or later adjournment, the Annual Meeting may be adjourned. Shareholders of record at the close of business on _____________, 2016 are entitled to notice of and to vote at the Annual Meeting and any adjournments thereof.

You are requested to complete and sign the enclosed form of proxy, which is solicited by the Board of Directors, and to mail it promptly in the enclosed postage-paid envelope. If you attend the Annual Meeting and wish to vote in person you may revoke your proxy at that time and vote by ballot.

Important Notice Regarding the Availability of Proxy Materials for the Annual Meeting of Shareholders to Be Held on ____________, 2016: the Proxy Statement, form of proxy and annual report to shareholders are available at https://www.proxyvote.com.

 

Our Board of Directors recommends that you vote FOR the approval of Proposals 1, 3 and 4 and FOR the election of the seven nominees as directors.

Mount Airy, North Carolina

______________, 2016

IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE THE COMPANY THE EXPENSE OF FURTHER REQUESTS FOR PROXIES IN ORDER TO ENSURE A QUORUM. A SELF-ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS REQUIRED IF MAILED IN THE UNITED STATES.

Notice to holders of shares of Preferred Stock:  Holders of shares of the Company’s Preferred Stock are not entitled to vote on any of the proposals to be voted on at the Annual Meeting. The proxy package is being provided to you for information purposes only.

 

SURREY BANCORP

ANNUAL MEETING OF SHAREHOLDERS

TABLE OF CONTENTS

 

 

SURREY BANCORP

145 North Renfro Street

Mount Airy, North Carolina 27030

Telephone:  (336) 783-3900

PROXY STATEMENT

FOR ANNUAL MEETING OF SHAREHOLDERS

To Be Held on ______________, 2016

Your vote is very important. For this reason, the Board of Directors is requesting that if you are not able to attend the Annual Meeting of Shareholders, you allow your Common Stock to be represented at the meeting by the proxies named in the enclosed proxy card. This Proxy Statement and the form of proxy was first mailed to all of our shareholders on or about ____________, 2016.

Surrey Bancorp is the bank holding company for Surrey Bank & Trust headquartered in Mount Airy, North Carolina. We have tried to make this Proxy Statement simple and easy to understand. The Securities and Exchange Commission (the “SEC”), encourages companies to use “plain English” and we will always try to communicate with you clearly and effectively. We will refer to Surrey Bancorp throughout this Proxy Statement as “we,” “us,” the “Company,” or “our Company,” and we will refer to Surrey Bank & Trust as the “Bank” or our “bank subsidiary.”

Purposes of Annual Meeting

The purpose of the Annual Meeting is to consider and act upon the following proposals:

1.

To approve an amendment to our Articles of Incorporation (the “Amendment”) to provide for the authorization of a new class of capital stock, Class A Common Stock, to reclassify certain of our shares of Common Stock as Class A Common Stock or to repurchase such shares for $12.75 per share, at the election of the relevant shareholders, for the purpose of discontinuing the registration of our Common Stock under the Securities Exchange Act of 1934, as amended (the “Reclassification”);

2.

To elect seven directors to serve a one year term until the Annual Meeting of Shareholders in 2017 or until their successors shall have been elected and qualified;

3.

To ratify the appointment of Elliott Davis Decosimo, PLLC as our Company’s independent registered accounting firm for the year ending December 31, 2016;

4.

To grant to the proxy holders discretionary authority to vote to adjourn the Annual Meeting, if necessary or appropriate, in order to solicit additional proxies in favor of any of the proposals; and

 

5.

To transact such other business as may properly come before the Annual Meeting or any adjournments thereof.

Our Board of Directors will have the discretion to determine if and when to effect the Reclassification, and reserves the right to abandon the Reclassification even if the Amendment is approved by the shareholders. The Reclassification will become effective at the time set forth in the Amendment and after the filing of the Amendment to our Articles of Incorporation as of its filing with the North Carolina Secretary of State. The form of the Amendment is attached to this Proxy Statement as Appendix A.

We expect that if our shareholders approve and the Board elects to effect the Amendment, the Reclassification will be completed as soon as practicable after the Annual Meeting.

Shareholders are also being asked to consider and vote upon any other matters that may properly be submitted to a vote at the Annual Meeting or any adjournments thereof. Other than the matters listed on the attached Notice of Annual Meeting of Shareholders, our Board is not aware of any other business to be conducted at the Annual Meeting.

Who Can Vote at the Annual Meeting?

Holders of record of Common Stock at the close of business on ____________, 2016 will be entitled to vote at the Annual Meeting (the “Record Date”). As of the Record Date, there were a total of [3,549,665] shares of Common Stock issued and outstanding. Each share of Common Stock entitles its owner to one vote on each matter calling for a vote of shareholders at the Annual Meeting. As of the Record Date, our executive officers and directors have the power to vote a total of [30.8%] of the Company’s issued and outstanding shares of Common Stock and they intend to vote all of those shares in favor of Proposals 1, 3 and 4 and in favor of the election of the seven nominees as directors.

As of the Record Date, there were a total of [189,356] shares of Series A Preferred Stock and [181,154] shares of Series D Preferred Stock (collectively, the “Preferred Stock”) issued and outstanding, but none of the shares of Preferred Stock have voting rights at the Annual Meeting.

Voting and Revocation of Proxies

 

You may vote your shares in person by attending the Annual Meeting, or by mailing us your completed proxy if you are unable or do not wish to attend. If you are a record shareholder you may also vote your shares over the Internet. If the enclosed proxy is properly completed, signed, dated and returned, and not revoked, it will be voted in accordance with the instructions given. If a proxy is returned with no instructions given, the proxy will be voted FOR the proposal to adopt the Amendment as stated in this Proxy Statement, FOR the election of the seven nominees for election as directors, FOR the ratification of the appointment of Elliott Davis Decosimo, PLLC as the Company’s independent registered accounting firm, and FOR the proposal to adjourn the Annual Meeting, if necessary or appropriate, to solicit additional proxies in favor of the proposed Amendment and Reclassification. Execution of a proxy gives the designated proxies discretionary authority to vote the shares represented by the proxy in accordance with their best judgment on any other business, if any, that may properly come before the Annual Meeting or any adjournments thereof.

 

Brokerage houses and nominees have been requested to forward these proxy materials to the beneficial owners of shares held of record by such persons, and upon request, the Company will reimburse such persons for their reasonable out-of-pocket expenses in doing so.

You can change or revoke your proxy at any time before it is voted at the Annual Meeting by:

·

delivering to our Secretary at our corporate offices on or before the business day prior to the Annual Meeting, a signed proxy card bearing a later date or a written revocation of the proxy;

·

voting again over the Internet before 11:59 p.m. Eastern Time on _____, 2016;

·

delivering to us at the Annual Meeting but prior to the taking of the vote a signed proxy card dated a later date or a written revocation; or

·

attending the Annual Meeting and voting in person.

If, however, you are a beneficial owner of shares of Common Stock that are not registered in your own name, you will need appropriate documentation from the holder of record of your shares to vote in person at the Annual Meeting.

Revoking a proxy will not affect the vote once it has been taken. Attendance at the Annual Meeting will not, in itself, constitute a revocation of a proxy. You must vote in person at the Annual Meeting if you wish to change a vote that you have previously made by submitting a signed proxy.

Vote Required for Approval

The presence, in person or by proxy, of the holders of at least a majority of our shares of Common Stock entitled to vote at the Annual Meeting is necessary to constitute a quorum. Because many of our shareholders cannot attend the Annual Meeting, it is necessary that a large number be represented by proxy. Accordingly, our Board of Directors has designated proxies to represent those shareholders who cannot be present in person and who desire to be so represented. In the event there are not sufficient shareholders present, in person or by proxy, to constitute a quorum or to approve or ratify any proposal at the time of the Annual Meeting, the Annual Meeting may be adjourned in order to permit the further solicitation of proxies.

Approval of the Amendment to our Articles of Incorporation which will implement the Reclassification requires the affirmative vote of a majority of the number of shares present and voting at the Annual Meeting.

 

The proposal to approve the Amendment is a “non-discretionary” item, meaning that brokerage firms cannot vote shares in their discretion on your behalf if you have not given the broker instructions to vote your shares held in “street” name. Accordingly, shares held in street name that have been designated by brokers on proxy cards as not voted with respect to that proposal (“broker non-vote shares”) will not be counted and will have no effect on the Amendment proposal. Broker non-votes will also not be counted for purposes of determining whether a quorum is present.

With respect to the election of directors, the seven nominees receiving the highest number of votes will be elected.

The ratification of the selection of Elliott Davis Decosimo, PLLC as our Company’s independent registered public accounting firm will be effective if a majority of the number of shares present and voting at the Annual Meeting vote for such ratification.

The proposal to adjourn the Annual Meeting, if necessary or appropriate, in order to solicit additional proxies in favor of any of the proposals will be effective if a majority of the number of shares present and voting at the Annual Meeting vote for such proposal.

Abstentions will be counted for purposes of determining whether a quorum is present at the Annual Meeting. However, like broker non-votes, abstentions will not be counted in tabulating the votes cast on any proposal submitted to the shareholders. As a result, abstentions will have no effect in the votes on the Amendment, on the election of directors, the ratification of our Company’s independent registered public accounting firm or the adjournment proposal.

As of the Record Date, the directors and executive officers of our Company have the power to vote a total of [1,093,843] (approximately [30.8%]) of the outstanding shares of Common Stock entitled to vote at the Annual Meeting. These directors and executive officers currently intend to vote FOR the Amendment, FOR the election of the seven nominees described herein, FOR the ratification of our Company’s independent public accounting firm, and FOR the proposal to adjourn the Annual Meeting, if necessary or appropriate, to solicit additional proxies in favor of any of the proposals.

Holders of shares of our Preferred Stock, are not entitled to vote on any of the proposals to be voted on at the Annual Meeting.

Solicitation of Proxies

Our Company will pay the cost of preparing, assembling and mailing this Proxy Statement and other related proxy solicitation expenses, if any. Solicitation of proxies will be made initially by mail. Directors, officers and employees of our Company and our wholly-owned bank subsidiary also may solicit proxies in person, by telephone or other means without additional compensation. Our Board reserves the right to engage a proxy solicitor to assist the Board in the solicitation of proxies in connection with this Annual Meeting.

We are mailing this proxy material to our shareholders on or about _____________, 2016.

 

Authority to Adjourn Annual Meeting to Solicit Additional Proxies

Our Board of Directors is currently not aware of any business to be brought before the Annual Meeting other than that described in this Proxy Statement. However, if other matters are properly presented, the persons named as proxies will vote in accordance with their best judgment with respect to those matters. We are asking our shareholders to grant full authority to adjourn the Annual Meeting to a later date to permit solicitation of additional proxies to approve the proposals described in this Proxy Statement.

Recommendation of Your Board of Directors

The Amendment and Reclassification have been unanimously approved by our Board of Directors. Your Board of Directors recommends a vote FOR adoption of the proposed Amendment to the Articles of Incorporation which will implement the Reclassification, FOR the election as directors of the seven nominees described herein, FOR the ratification of the selection of Elliott Davis Decosimo, PLLC as the Company’s registered independent public accounting firm, and FOR the proposal to adjourn the Annual Meeting, if necessary or appropriate, to solicit additional proxies in favor of any of the proposals.

 

QUESTIONS AND ANSWERS ABOUT AND SUMMARY TERMS OF THE

RECLASSIFICATION

Thus, for purposes of this Proxy Statement, when we refer to the term “Reclassification,” we are referring to the creation of Class A Common Stock, and the right of holders of less than 300 shares of Common Stock to receive, at their election either shares of Class A Common Stock on a one-for-one basis or $12.75 per share for their shares of Common Stock.

·

the approximate number of our record shareholders holding shares of Common Stock will be [833];

·

the approximate number of our record shareholders holding shares of Class A Common Stock will be less than [580] (with the actual number being determined by the number of holders of less than 300 shares of Common Stock who elect the Cash Election);

·

because of the reduction of our total number of record shareholders of Common Stock to less than 1,200 and because the total number of record shareholders of the Class A Common Stock will be less than 2,000, we will be allowed to terminate our status as a reporting company with the SEC;

 

·

the shares of Class A Common Stock and Common Stock will be freely tradable, but there may be less liquidity for these shares than there currently is for our Common Stock; however we intend to maintain lists of willing sellers and buyers of Class A Common Stock and Common Stock;

·

those shareholders who elect to receive shares of Class A Common Stock will continue to have an equity interest in our Company and therefore will still be entitled to participate in any future value received as a result of a sale of the Company, if any;

·

holders of Class A Common Stock will not have any voting rights, unless otherwise required by law. Under North Carolina law, holders of Class A Common Stock will generally be entitled to vote as a separate voting group on proposals that will affect the Class A Common Stock, including transactions that will result in a change of control of the Company by merger, share exchange or otherwise;

·

holders of our Common Stock will not be entitled to receive dividends unless dividends are paid on our shares of Class A Common Stock;

·

holders of Class A Common Stock will be entitled to a premium on any dividends paid on our Common Stock of $0.03 per share;

·

upon liquidation, holders of Class A Common Stock will be entitled to distribution of assets on the same basis as holders of Common Stock; and

·

holders of shares of Class A Common Stock and Common Stock shall be entitled to receive the same consideration per share in any merger, share exchange, sale of substantially all of the assets of the Company or similar change of control transaction.

For a further description of how the Reclassification will affect you, please see “- Effects of the Reclassification on Shareholders of the Company” beginning on page ___.

 

If the Amendment is approved and the Reclassification occurs, we currently intend to send to all of our shareholders quarterly and annual letters updating them on our performance. These quarterly and annual letters will not provide the detailed information included in our SEC reports, but rather will be abbreviated summaries of our performance for the most recently completed quarter or year and will include a short summary of our earnings results and asset and liability growth for the period presented as well as updates on any material developments during the quarter. We also currently intend to provide our shareholders with annual audited financial statements.

In addition to these quarterly and annual letters, the Company and the Bank, will continue to file regulatory reports with federal regulators. Under the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and Federal Deposit Insurance Corporation (the “FDIC”) requirements, the Company will file quarterly FR Y-9C and the Bank will file Consolidated Reports on Condition and Income (Call Reports). These reports, which are publicly available two days after the filing deadline in the case of FR Y-9C filings and 15 days after the filing deadline in the case of Call Reports, are a compilation of schedules relating to the filing entity’s balance sheet and income statement. Unlike our SEC reports though, these regulatory filings do not provide a detailed discussion and analysis of our financial condition and results of operations like the management’s discussion and analysis included in our SEC reports, and shareholders will not have the benefit of management’s detailed analysis of our results. Nor will these filings include any detailed information on our executive compensation programs and philosophies or the specific amounts we pay our executive officers and directors.

If we are no longer a public reporting company, we will no longer be subject to many of the provisions of the Sarbanes-Oxley Act, which among other things, requires that our Chief Executive Officer (the “CEO”) and Chief Financial Officer (the “CFO”) certify as to the accuracy of our financial statements and the accuracy of our internal control over financial reporting. The Sarbanes-Oxley Act, and the related rules and regulations of the SEC, also require that we disclose to you certain information about our Board of Directors and certain of its committees, including whether or not a majority of our directors and the members of certain of the committees are independent under the standards of, in our case, The NASDAQ Stock Market (the “NASDAQ”). If the reclassification transaction is approved, we will no longer be required to disclose this information to you.

 

Although we will no longer be subject to the SEC’s rules and regulations, including the rules and regulations enacted as a result of the Sarbanes-Oxley Act or the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Company will continue to be regulated by the Federal Reserve Board and the Bank will continue to be regulated by the FDIC and the North Carolina Commissioner of Banks (“NCCOB”). We will also continue to be subject to the anti-fraud provisions of the federal securities laws and the securities laws of the State of North Carolina. The federal bank regulators, the SEC and the North Carolina Securities Administrator, as the case may be, will each retain authority to enforce these laws against us with respect to all of our outstanding stock, including the Common Stock and the Class A Common Stock.

In addition to the reduced availability of detailed information, the liquidity of the Common Stock and the Class A Common Stock you hold in the Company is likely to be further reduced if we are no longer a reporting company. There will be no public information available about trades involving the Company’s capital stock and all of our stock will only be tradable in privately negotiated transactions.

·

the ongoing and prospective administrative burden and expense of making our periodic filings with the SEC and complying with the Sarbanes-Oxley Act and the rules and regulations promulgated by the SEC thereunder;

·

the fact that operating as a non-SEC reporting company will reduce the burden on our management and employees which arises from monitoring and complying with increasingly complex SEC reporting requirements, thus allowing management to focus more of its attention on our customers and the community in which we operate;

·

the very limited trading volume of our Common Stock, the resulting lack of an active market for our shareholders and the absence of published research concerning our Company by stock analysts;

·

the fact that a “going private” transaction could be structured in a manner whereby all of our shareholders may retain an equity interest in the Company, and would not be forced out by means of a reverse stock split or other transaction;

·

the estimated expense of a “going private” transaction;

·

the fact that the Reclassification allows us to discontinue our reporting obligations with the SEC, while still allowing those shareholders receiving shares of Class A Common Stock to retain an equity interest in our Company with what the Board believes is approximately the same value per share as holders of Common Stock;

 

·

the fact that our earnings have historically been sufficient to support our growth without the need to raise capital through the public capital markets; and

·

the fact that our holding company structure now allows us to raise additional capital for the Bank through borrowing money at the holding company level, which would not dilute the ownership interest of our then shareholders.

We considered that some of our shareholders may prefer that we continue as an SEC reporting company, which is a factor weighing against the Reclassification. However, we believe that the disadvantages and costs of continuing our reporting obligations with the SEC and continuing to comply with the Sarbanes-Oxley Act and provisions of the Dodd-Frank Act applicable to public reporting companies our size outweigh any advantages associated with doing so. See “Reasons for the Reclassification; Fairness of the Reclassification; Board Recommendation” beginning on page __.

When considering whether to recommend the Amendment and the Reclassification, the Board of Directors considered alternative methods of reducing our number of shareholders to allow us to suspend SEC reporting requirements, including open market repurchases, a tender offer and a reverse stock split. For a more detailed discussion of these alternative methods that were considered by our Board see “Background of the Reclassification” beginning on page __.

Based on a careful review of the facts and circumstances relating to the Reclassification, our Board of Directors believes that the Amendment and the terms and provisions of the Reclassification are substantively and procedurally fair to our shareholders, including our affiliated and unaffiliated shareholders, whether they will retain Common Stock or, at their election, will receive shares or Class A Common Stock or $12.75 per share for their Common Stock.

In the course of determining that the Amendment and the Reclassification are procedurally and substantively fair to and are in the best interests of our shareholders, including both affiliated and nonaffiliated shareholders who will hold shares of Class A Common Stock or receive cash for their shares, our Board considered a number of positive and negative factors affecting these groups of shareholders in making their determination. To review the reasons for the Reclassification in greater detail, please see “Reasons for the Reclassification; Fairness of the Reclassification; Board Recommendation” beginning on page __.

We expect that each of our directors and executive officers will own individually, or jointly with their spouse, more than 300 shares of Common Stock at the effective time of the Reclassification, and will therefore will continue to hold shares of Common Stock if the Reclassification is approved. These directors and executive officers collectively own [1,093,843] shares, or [30.8%], of the outstanding shares of our Common Stock.

 

In the event the proposal to approve the Amendment and effect the Reclassification is adopted and you elect to receive shares of Class A Common Stock:

·

you will receive no additional consideration for your shares of Common Stock when they are reclassified as shares of Class A Common Stock;

·

you will hold shares that may be less liquid than the shares you currently hold because there is no existing market, nor do we expect a market will develop, for our Class A Common Stock; however we intend to maintain lists of willing sellers and buyers of Class A Common Stock, just as we currently do for our Common Stock;

·

you will receive a security with no voting rights, except as required by law. Under North Carolina law, holders of Class A Common Stock will generally be entitled to vote as a separate voting group on proposals that will affect the Class A Common Stock, including transactions that will result in a change of control of the Company by merger, share exchange or otherwise; and

·

all of our shareholders will lose the benefits of holding securities registered under Section 12 of the Exchange Act.

In the event you make the Cash Election:

·

you will receive $12.75 per share for each of your shares of Common Stock; and

·

you will cease to be a shareholder of the Company with respect to the shares repurchased by the Company.

 

For a complete description of the terms of the Class A Common Stock, please refer to “Class A Common Stock to be Issued if the Amendment is Approved” beginning on page __.

 

 

If you hold your shares in “street name,” you should talk to your broker, nominee, agent or custodian to determine how they expect the Reclassification to affect you. Because other “street name” holders who hold through your broker, agent or nominee may adjust their holdings prior to the Reclassification, you may have no way of knowing whether you will continue to hold shares of Common Stock, or if you will have the right to elect to receive shares of Class A Common Stock or cash in the Reclassification until it is completed.

 

We may then file a Form 15 and terminate the registration of our Common Stock and the obligation to file Section 13(a) periodic reports arising under Section 12; however, our periodic reporting obligations arising under Section 15(d) of the Exchange Act, cannot be terminated, but can only be suspended. Therefore, if our shareholders of record for the Common Stock ever rise above 1,200 as of the last day of any fiscal year, then we will again be responsible for making filings in compliance with Section 15(d). This would require us to file periodic reports going forward and an annual report for the preceding fiscal year.

 

·

the Reclassification should result in no material federal income tax consequences to the Company;

·

those shareholders receiving Class A Common Stock for their shares of Common Stock will not recognize any gain or loss in the Reclassification, their basis in the Class A Common Stock will equal the basis in their shares of Common Stock, and their holding period for shares of Class A Common Stock will include the holding period during which their shares of Common Stock were held;

·

where Class A Common Stock is received for Common Stock in a tax-free recapitalization, we expect that the proceeds from a subsequent sale of the Class A Common Stock will be treated as capital gain or loss to most shareholders. However, the Class A Common Stock could be considered Section 306 stock as defined under the Internal Revenue Code of 1986, as amended (the “Code”), and in that case the proceeds from a subsequent sale of Class A Common Stock (i) will be treated as ordinary income (dividend income) to the extent that the fair market value of the shares sold, on the date distributed to the shareholder, would have been a dividend to such shareholder had we distributed cash in lieu of stock; (ii) any excess of the amount received over the amount treated as ordinary income plus the cost basis of the stock will be treated as a capital gain; and (iii) no loss, if any, will be recognized. Under current tax law, if proceeds are treated as dividend income, such proceeds will be taxed at the same rates that apply to net capital gains (i.e., a maximum rate of 20%);

·

those holders of Common Stock who make a Cash Election and receive $12.75 per share for shares of Common Stock held as a capital asset will generally recognize capital gain (or loss) measured by the difference between the amount of cash received and the holder’s basis in those shares, provided that the payment is treated as an exchange pursuant to Section 302 of the Code, and not otherwise equivalent to a dividend. The capital gain or loss will be long-term capital gain (or loss) if the holder’s holding period for the repurchased shares is more than one year;

 

·

those holders of Common Stock who make a Cash Election and receive $12.75 per share for shares of Common Stock may recognize net investment income subject to a 3.8% tax on the difference between the amount of cash received and the holder’s basis in those shares provided that the holders adjusted gross income exceeds $200,000 ($250,000 if filing jointly). Net investment income is limited to the lesser of the net investment income or excess of adjusted gross income as defined in Section 1411 of the Code over the threshold amount of $200,000 ($250,000 if filing jointly); and

·

those shareholders continuing to hold Common Stock will not recognize any gain or loss or dividend income in connection with the Reclassification but will continue to recognize dividend income (and possibly net investment income) in connection with regular quarterly dividends.

For a description of the tax consequences of the Reclassification, see the section entitled “Material Federal Income Tax Consequences of the Reclassification,” beginning on page ___ of this Proxy Statement.

Because determining the tax consequences of the Reclassification can be complicated and depends on your particular tax circumstances, you should consult your own tax advisor to understand fully how the Reclassification will affect you.

 

We expect that all of our directors and executive officers will individually, or jointly with their spouse, own more than 300 shares of Common Stock at the effective time of the Reclassification, and will therefore continue as holders of Common Stock if the Amendment is approved and the Reclassification occurs. In addition, because there will be fewer outstanding shares of Common Stock, these directors and executive officers will own a larger relative percentage of the Common Stock on a post-transaction basis, which will continue to have exclusive voting control over the Company as compared to the shares of Class A Common Stock which will have no voting rights except as otherwise required by law. Under North Carolina law, holders of Class A Common Stock will generally be entitled to vote as a separate voting group on proposals that will affect the Class A Common Stock, including transactions that will result in a change of control of the Company by merger, share exchange or otherwise. As of the Record Date, our directors and executive officers collectively beneficially held [1,248,232] shares (including exercisable stock options and shares of Preferred Stock which are convertible into shares of Common Stock) or [33.7%] of our Common Stock. Not including stock options or Preferred Stock, these persons beneficially owned [1,093,843] shares, or [30.8%], of our Common Stock. Based upon our estimates, taking into account the effect of the Reclassification on our outstanding shares of Common Stock as described above, the directors and executive officers will beneficially hold [34.7%] of our Common Stock (including exercisable stock options) following consummation of the Reclassification. Additionally, our directors and executive officers beneficially own [36,420] shares, or [19.2%], of our Series A Preferred Stock and [60,169] shares, or [33.2%], of our Series D Preferred Stock. Each share of Series A Preferred Stock is convertible into 2.2955 shares of Common Stock. Each share of Series D Preferred Stock is convertible into 1.10 shares of Common Stock. This represents a potential conflict of interest because our directors approved the Reclassification and are recommending that you approve it.

If the Reclassification is consummated, we will no longer be required to comply with many of the provisions of the Sarbanes-Oxley Act, which impose potentially greater liability on our directors and officers. For example, our CEO and CFO will no longer be required to certify as to the accuracy of our financial statements. In addition, our directors and executive officers will no longer be subject to liability for short-swing profits under Section 16 of the Exchange Act. Nor will we be required to make detailed disclosures to you about the background and business experience of our officers and directors or the compensation we pay to them. We will also no longer be required to disclose to you information about certain transactions that we may enter into with our officers and directors or members of their family or businesses that they own. Finally, our officers and directors will continue to be eligible for indemnification for their actions in accordance with our Articles of Incorporation, bylaws and North Carolina law, subject to limitation under federal banking laws and regulations, but will no longer be subject to any limitations on indemnification under public policies of the SEC.

Despite these potential conflicts of interest, our Board believes the proposed Reclassification is procedurally and substantively fair to all shareholders, including our affiliated and unaffiliated shareholders whether they will retain Common Stock, are issued Class A Common Stock or receive $12.75 per share of Common Stock, for the reasons discussed in this Proxy Statement.

 

PROPOSAL 1: AMENDMENT TO OUR ARTICLES OF

INCORPORATION AND RECLASSIFICATION

SPECIAL FACTORS

Overview of the Reclassification

This Proxy Statement is being furnished in connection with the solicitation of proxies by our Board of Directors for our Annual Meeting of Shareholders at which our shareholders will be asked to consider and vote on a proposal to amend our Articles of Incorporation. If approved, the Amendment will provide for (i) the authorization of a new class of securities entitled Class A Common Stock, and (ii) the reclassification of shares of our Common Stock held by shareholders who own less than 300 shares as shares of Class A Common Stock except for those shares of Common Stock held by such holders who make a Cash Election. The Reclassification will be made on the basis of one share of Class A Common Stock as described above for each share of Common Stock held immediately prior to the Reclassification.

 

Record shareholders holding 300 or more shares of Common Stock immediately before the effective time of the Reclassification will hold the same number of shares of Common Stock following the Reclassification and record holders of less than 300 shares of Common Stock will no longer hold Common Stock in the Company. We intend, immediately following the Reclassification, to initiate efforts to terminate the registration of our shares of Common Stock under the Exchange Act, although we may be required to continue filing certain reports with the SEC for up to 90 days following termination of our registration requirement and possibly beyond that date until we file an annual report on Form 10-K for the year ending December 31, 2016. We intend to seek no-action relief from the SEC permitting us to avoid filing a Form 10-K for the year ended December 31, 2016, but cannot guarantee that the SEC will grant such relief.

If the Amendment is approved by our shareholders at the Annual Meeting and the Reclassification is implemented by our Board of Directors, the Reclassification will generally affect our shareholders as follows:

 

The effects of the Reclassification on each group of shareholders are described more fully below under “- Effects of the Reclassification on Shareholders of the Company” beginning on page __ and the effects on the Company are described more fully below under “- Plans or Proposals” beginning on page __.

Background of the Reclassification

The Company was incorporated in 2003 and thereupon began complying with the Exchange Act, including preparing and filing periodic reports, including annual shareholder reports and proxy statements.

On April 5, 2012, President Obama signed the Jumpstart Our Business Startups Act, which we refer to as the JOBS Act, which, among other things, raised the threshold for the number of shareholders that a company must have to be required to register a class of securities and for banks and bank holding companies to deregister their securities under the Exchange Act. Specifically, the JOBS Act amended the Exchange Act, to permit banks and bank holding companies to deregister under the Exchange Act, if their shares are held by less than 1,200 record holders.

 

In light of the adoption of the JOBS Act, management of the Company discussed with the Company’s counsel the benefits and other costs of remaining public, the benefits and costs associated with various procedures for “going private,” including a stock repurchase, a reverse stock split, or a reclassification of the existing Common Stock into classes of stock that did not require registration.

At a series of meetings of our Board of Directors held in late 2015 and early 2016, the burdens and costs associated with being a public company and ways to better manage our large shareholder base and thinly traded Common Stock were further discussed. Over the course of these meetings, our Board had substantial discussions regarding the costs associated with going private and the ongoing costs of remaining an SEC-reporting company. The Board also discussed alternatives to a stock reclassification, including a tender offer, a stock repurchase on the open market or a reverse stock split whereby shareholders owning less than a certain number of shares would be “cashed out.” The approximate cost to cash-out enough holders of our Common Stock to bring the number of our record holders to around 833 (the number of record holders of our Common Stock that we anticipate to have following consummation of the Reclassification) would have been approximately $1.2 million (the purchase of approximately 102,920 shares of Common Stock at $11.25 per share, which is the weighted average price of the Common Stock for the 90 day period prior to January 15, 2016). The Board, however, preferred the Reclassification, including a repurchase election, because it allowed those shareholders affected by the Reclassification to choose to either maintain an equity position in the Company or liquidate their shares. An equity position in the Company would allow the shareholders to participate and share in any profits should a sale of the Company occur. At these meetings, the Board also considered the potential negative consequences of the Reclassification to our shareholders, and, in particular, the shareholders whose shares would be reclassified into Class A Common Stock or repurchased for cash. However, the Board believed that although our shareholders will lose the benefits of holding publicly registered stock and the Class A Common Stock will additionally lose their voting rights (except under certain circumstances), the Board concluded that the benefit of the Reclassification was that it would allow these shareholders affected by the Reclassification to choose to either receive the Class A Common Stock and maintain an equity position in the Company or choose to receive cash for their shares. Even with the reduced liquidity and no trading market for our Class A Common Stock, our Board believes maintaining an equity ownership interest in the Company will be beneficial because of the value a shareholder may receive for its shares in any future merger or sale of the Company. After these discussions, the Board instructed counsel and its independent accountants to proceed with attempting to reclassify our shares of Common Stock in order to no longer be a publicly reporting company. The Board’s decision was based on:

·

the ongoing administrative burden and expense of making our periodic filings with the SEC;

·

the fact that operating as a non-SEC reporting company will reduce the burden on our management and employees which arises from increasingly stringent SEC reporting requirements, thus allowing management to focus more of its attention on our customers and the community in which we operate;

 

·

the very limited trading volume of our Common Stock and the resulting lack of an active market for our shareholders;

·

the fact that a “going private” transaction could be structured in a manner whereby all of our shareholders may choose to retain an equity interest in the Company, and would not be forced out by means of a cash reverse stock split or other transaction;

·

the estimated expense of a “going private” transaction;

·

the fact that the Reclassification proposal allows us to discontinue our reporting obligations with the SEC, while still allowing those shareholders who choose to receive shares of Class A Common Stock to retain an equity interest in our Company at the same value per share as holders of Common Stock in the event of any sale of the Company;

·

the fact that our earnings have historically been sufficient to support our growth without the need to raise capital through the public capital markets; and

·

the fact that our holding company structure now allows us to raise additional capital for our bank subsidiary through additional borrowings, which would not dilute the ownership interest of our shareholders.

We do not currently have and do not anticipate having a significant need for access to additional capital, and the additional costs associated with being an SEC reporting company are significant. Although management took into account the fact that in the event we are no longer public, our shares may be even less liquid than they are now, because our shares are not listed on an exchange currently, being public does not materially enhance the liquidity of our stock. Therefore, our management concluded that we should reduce the number of shareholders of record holding Common Stock to below 1,200. In considering the Reclassification, our Board of Directors considered various alternative transactions with the goal of reducing the number of shareholders below the level requiring reporting with the SEC, including a reverse stock split in which shareholders owning below a certain number of shares would have their shares cashed out; an open market repurchase of outstanding shares; and a tender offer to our shareholders. The Board of Directors chose the Reclassification because it believed that these other methods would be more costly to the Company than the Reclassification and that the likelihood of reducing the number of record shareholders below the required threshold through a tender offer or open market repurchase was low. Further, the Board of Directors chose the Reclassification over these other transactions because it would allow all of the Company’s shareholders to retain an equity interest in the Company and allow each shareholder, including those holding Class A Common Stock, to receive the same per share consideration in the event of a sale of the Company.

 

Because our Board members would be treated the same as our other shareholders in the Reclassification and no consideration had been given to the share cutoff number relative to the share ownership of the Board members, the Board did not form an independent special committee to evaluate the Reclassification. The Board discussed requiring approval of the Reclassification by a majority of unaffiliated shareholders and considered the fact that the interests of the shareholders receiving shares of Class A Common Stock or cash, at their election, are different from the interests of the shareholders continuing to own Common Stock and may create actual or potential conflicts of interest in connection with the Reclassification. However, because affiliated and unaffiliated shareholders would be treated identically in terms of the approval process of the Reclassification, the Board believed a special vote of the unaffiliated shareholders was not necessary.

After a full discussion, our Board of Directors unanimously approved the proposed Amendment to authorize shares of Class A Common Stock and to reclassify our outstanding shares of Common Stock as follows: shareholders holding 300 shares of Common Stock or more will continue to be classified as holders of Common Stock; shareholders of Common Stock holding less than 300 shares will be offered the choice of having their shares reclassified as Class A Common Stock or receiving $12.75 per share. The approval of the Amendment and the Reclassification was based upon the factors discussed above.

Reasons for the Reclassification; Fairness of the Reclassification; Board Recommendation

Reasons for the Reclassification

Our shares of Common Stock are registered with the SEC because we have over 500 common shareholders of record and more than $10 million in total assets. As a locally owned community bank holding company whose shares are not listed on any exchange, we have incurred the costs associated with being a public company, while not enjoying many of the benefits associated with being a public company.

On April 5, 2012, President Obama signed the JOBS Act, which, among other things, raised the threshold for the number of shareholders that a company must have to be required to register a class of securities and for banks and bank holding companies to deregister their securities under the Exchange Act. Specifically, the JOBS Act amended the Exchange Act to permit banks and bank holding companies to deregister under the Exchange Act if their shares are held by less than 1,200 record holders. In November 2015 our Board began to discuss the currently proposed Reclassification. We are undertaking the Reclassification at this time to end our SEC reporting obligations in order to save the Company and our shareholders the substantial costs associated with being a reporting company, which costs are only expected to increase over time. The specific factors considered in electing at this time to undertake the reclassification transaction and become a non-SEC reporting company are as follows:

 

·

We estimate that we will eliminate costs and avoid immediately anticipated future costs of approximately $170,000 annually by eliminating the requirement to make periodic reports and reducing the expenses of mandatory shareholder communications. These expenses include legal expenses ($8,500), accounting and other expenses related to filing our periodic reports ($53,450), printing and postage ($12,000), and software and data processing ($25,000) necessitated by a large group of shareholders that hold a small interest in the outstanding shares of Common Stock. We will also realize cost savings by avoiding the need to add additional staff and from reduced staff and management time ($71,050) spent on reporting and securities law compliance matters. Although we plan to have our financial statements audited going forward and will prepare an annual update of our results for our shareholders, we expect these costs to be approximately $49,000 per year, which is less than our current costs of approximately $106,000 per year. These savings relate to the elimination of the review by our auditors of our quarterly and annual reports to the SEC and the elimination of the audit of our assessment of the effectiveness of our internal control over financial reporting by our auditor.

·

We believe that, as a result of the disclosure and procedural requirements resulting from the Sarbanes-Oxley Act, the legal, accounting and administrative expense, and diversion of our Board of Directors, management and staff effort necessary to continue as an SEC reporting company will continue to increase, without a commensurate benefit to our shareholders. We expect to continue to provide our shareholders with Company financial information by disseminating quarterly and annual newsletters and financial summaries, but, as noted above, the costs associated with these reports are substantially less than those we incur currently.

·

In our Board of Directors’ judgment, little or no justification exists for the continuing direct and indirect costs of registration with the SEC, which costs have recently increased as a result of heightened government oversight, and the requirement that portions of our annual and quarterly filings with the SEC be tagged in XBRL format, given the low trading volume in our Common Stock and given that we believe that our earnings are sufficient to support our expected growth and we therefore do not depend on raising capital in the public equity market, and do not expect to do so in the near future. If it becomes necessary to raise additional capital, we believe that our holding company structure allows us access to adequate sources of additional capital, whether through bank borrowings or through private or institutional sales of equity or debt securities, although we recognize that there can be no assurance that we will be able to raise additional capital when required, or that the cost of additional capital will be attractive.

·

Operating as a non-SEC reporting company will reduce the burden on our management that arises from the increasingly complex and frequently changing SEC reporting requirements, thus allowing management to focus more of its attention on our customers and the community in which we operate.

·

The Reclassification will allow us to discontinue our reporting obligations with the SEC, and allows those shareholders who choose to receive shares of Class A Common Stock to still retain an equity interest in the Company and therefore participate at the same value per share as holders of Common Stock in the event of any sale of the Company.

 

·

Completing the Reclassification at this time will allow us to begin to realize the cost savings, and will allow our management to redirect its focus to our customers and communities.

We considered that some shareholders may prefer that we continue as an SEC reporting company, which is a factor weighing against the reclassification transaction. However, we believe that the disadvantages of remaining a public company subject to the registration and reporting requirements of the SEC outweigh any advantages. Historically, our shares of Common Stock have been inactively traded. For example, for the 12 month period ended January 15, 2016, only 158,000 shares, or approximately 4.5% of our outstanding shares of Common Stock, were traded; and for the 12 month period ended January 15, 2015, only 54,000 shares, or approximately 1.5% of our outstanding shares of Common Stock were traded. Also, we have no present intention to raise capital through sales of equity securities in a public offering in the future or to acquire other business entities using shares as the consideration for such acquisition. Accordingly, we are not likely to make use of the primary advantages that our status as an SEC reporting company may offer.

We also note that quarterly financial information, including income statements and a balance sheet, for the Company and the Bank, is and will continue to be available online at the website of the Federal Reserve Board and the FDIC, respectively. In addition, we intend to continue to provide audited annual financial statements to all shareholders.

Other than the cost savings and other benefits associated with becoming a non-SEC reporting company, as outlined above, we do not have any other purpose for engaging in the Reclassification at this particular time.

In view of the wide variety of factors considered in connection with its evaluation of the Reclassification, our Board of Directors did not find it practicable to, and did not, quantify or otherwise attempt to assign relative weights to the specific factors it considered in reaching its determinations.

The Reclassification, if completed, will have different effects on the holders of Common Stock and those electing to receive shares of Class A Common Stock. You should read “- Our Position as to the Fairness of the Reclassification” beginning on page __ and “- Effects of the Reclassification on Shareholders of the Company” beginning on page __ for more information regarding these effects of the reclassification transaction.

We considered various alternative transactions to accomplish our objective of “deregistering” with the SEC, including a tender offer, a share repurchase on the open market or a reverse stock split whereby shareholders owning less than a certain number of shares would be “cashed out.” We ultimately elected to proceed with the Reclassification because the alternatives would be more costly, might not have reduced the number of shareholders of record below 1,200 and would not allow all shareholders the opportunity to retain an equity interest in the Company. We have not sought, and have not received, any firm proposals from third parties for any business combination transactions, such as a merger, or sale of all or substantially all of our assets. Our Board did not seek any such proposals because these types of transactions are inconsistent with the narrower purpose of the proposed transaction, which is to discontinue our SEC reporting obligations. In addition, the enactment of the JOBS Act in April 2012, which, among other things, raised the threshold for the number of shareholders that a company may have to be able to deregister its securities under the Exchange Act, made such a reclassification transaction more feasible for us than under prior law. Our Board believes that by implementing a deregistration transaction, our management will be better positioned to focus its attention on our customers and the communities in which we operate, and expenses will be reduced. See “- Purpose and Structure of the Reclassification” beginning on page __ for further information as to why this reclassification transaction structure was chosen.

 

Our Position as to the Fairness of the Reclassification

Based on a careful review of the facts and circumstances relating to the Reclassification, our Board of Directors, on behalf of the Company, believes that the Reclassification, including all its terms and provisions, is substantively and procedurally fair to our unaffiliated shareholders. Our Board of Directors unanimously approved the Amendment and the Reclassification and has recommended that our shareholders vote FOR the Amendment necessary to effect the Reclassification.

Substantive Fairness

In concluding that the terms and conditions of the Rule 13e-3 transaction and the Reclassification are substantively fair to unaffiliated shareholders, our Board of Directors, on behalf of the Company, considered a number of factors. In its consideration of both the procedural and substantive fairness of the transaction, our Board considered the potential effect of the transaction as it relates to all shareholders generally, to shareholders electing to receive Class A Common Stock, to shareholders electing to receive cash for their shares, and to shareholders continuing to own shares of Common Stock. See “- Effects of the Reclassification on Shareholders of the Company” beginning on page __.

The factors that our Board of Directors considered positive for all shareholders, including those that will continue to hold Common Stock, those that elect to have their shares converted into Class A Common Stock, and those who elect to receive $12.75 per share, include the following:

·

our Common Stock trades infrequently, with (i) only 58 reported trades occurring within the 12 month period ended January 15, 2015, involving only 54,000 shares, or approximately 1.5% of our outstanding Common Stock, and (ii) only 158,000 reported trades occurring within the 12 month period ended January 15, 2016, involving only 158,000 shares, or approximately 4.5% of our outstanding Common Stock, volumes that our Board felt did not provide our shareholders with sufficient opportunity to easily obtain cash for their shares;

·

our smaller shareholders who prefer to remain as holders of Common Stock of the Company, may elect to do so by acquiring sufficient shares or consolidating shares of Common Stock held in different names or separately with other family members so that they hold at least 300 shares of Common Stock in their own names immediately prior to the Reclassification. The price to purchase 300 shares (using a price of [$10.85] per share, which is the last known trade for our Common Stock) is [$3,255]; provided, however, that the actual cost to acquire a total of 300 shares could be less due to the fact that a shareholder would already own some shares; and provided further, that it may be difficult to acquire a sufficient number of our shares of our Common Stock due to its illiquidity;

 

·

beneficial owners who hold their shares in “street name,” who would receive shares of Class A Common Stock if they were record owners instead of beneficial owners, and who wish to receive shares of Class A Common Stock as if they were record owners instead of beneficial owners, can work with their broker or nominee to transfer their shares into a record account in their own name so that they receive shares of Class A Common Stock or cash for such shares at their election;

·

shareholders receive limited benefit from our being an SEC reporting company because of our small size, the absence of analyst coverage and the very limited trading of our Common Stock compared to the costs associated with the disclosure and procedural requirements of the Exchange Act, the Sarbanes-Oxley Act and the Dodd-Frank Act, in addition to the legal, accounting and administrative costs in being a public company; accordingly we believe that the costs to our shareholders of being a public company are not commensurate with the benefits to our shareholders of being a public company;

·

all shareholders will realize the potential benefits of termination of registration of our Common Stock, including reduced expenses as a result of no longer needing to comply with SEC reporting requirements; and

·

certain North Carolina statutory anti-takeover law provisions will no longer be applicable.

In addition to the positive factors applicable to all of our shareholders set forth above, the factors that our Board of Directors considered positive for those shareholders who elect to receive Class A Common Stock included:

·

the Amendment specifically provides that shares of Common Stock and Class A Common Stock shall be entitled to receive the same consideration per share in any merger, reclassification or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property;

·

the holders of Class A Common Stock would receive a premium on any dividends paid to holders of Common Stock of $0.03 per share; and

·

no brokerage or other transaction costs are to be incurred by them in connection with the reclassification of their shares of Common Stock into Class A Common Stock.

 

Also, the Board considered the following as positive factors for shareholders who make a Cash Election:

·

the ability of our smaller shareholders to elect to receive cash for their shares of Common Stock whereas it is ordinarily difficult for shareholders to sell their shares due to the illiquidity of and very limited market for our Common Stock; and

·

Equity Research Services delivered a written opinion to the Board of Directors that the Cash Election price of $12.75 per share is fair, from a financial point of view, as of the date of the opinion to the Company’s shareholders;

Our Board considered each of the foregoing factors to weigh in favor of the substantive fairness of the Reclassification to all of our shareholders, including our affiliated and unaffiliated shareholders, whether they will retain Common Stock, are issued Class A Common Stock or elect to receive $12.75 per share.

Our Board is aware of, and has considered, the impact of certain potentially countervailing factors on the substantive fairness of the Reclassification to our unaffiliated shareholders who elect to receive Class A Common Stock. In particular, the factors that our Board of Directors considered as potentially negative for those shareholders receiving Class A Common Stock included:

·

they will be required to surrender their shares involuntarily in exchange for the Class A Common Stock, although they will still have the opportunity to participate in any future growth and earnings of the Company; and

·

they will lose voting rights except in certain limited situations, which loss may result in making these shares of Class A Common Stock less valuable; although the Board considered the potential loss in value, the Board took into account the fact that the premium on the dividends for the Class A Common Stock may have the countervailing effect of making these shares more valuable.

The factors that our Board of Directors considered as potentially negative for all shareholders included:

·

following the Reclassification, there will continue not to be a public market in any of the Common Stock or the Class A Common Stock, and shares of each will continue to be tradable only in privately-negotiated transactions. Since each class will have fewer holders than currently held Common Stock, sales or purchase of shares of each class may be more difficult to accomplish;

·

shareholders will have reduced access to our financial information as well as information regarding our executive compensation programs and the compensation paid to our directors and executive officers once we are no longer an SEC reporting company, although we do intend to continue to provide all shareholders with quarterly and annual newsletters and financial information and periodic information (e.g., shareholder letters which would include information updating our financial performance and any other material development affecting the Company, such as new offices, acquisitions, or new product offerings) and the Bank will continue to file its call reports on a quarterly basis with the FDIC;

 

·

shareholders will lose certain statutory safeguards since we will no longer be subject to many of the requirements of the Sarbanes-Oxley Act, which, among other things, require our CEO and CFO to certify as to our financial statements and internal controls over financial reporting and as to the accuracy of our reports filed with the SEC;

·

following the Reclassification, we will no longer be required to disclose to shareholders whether we have entered into any related party transactions with our directors or affiliates, although we will continue to be subject to regulations with respect to loans between the Bank and its directors and officers;

·

shareholders will lose certain protections currently provided under the Exchange Act, such as limitations on short-swing purchase/sale transactions in the Common Stock by executive officers and directors under Section 16 of the Exchange Act; and

·

following the Reclassification, we will no longer be required to disclose to shareholders whether our Board of Directors or certain committees of our Board are made up of independent directors, although we presently have no intention to change the composition of our Board.

Our Board of Directors believes that these potentially countervailing factors did not, individually or in the aggregate, outweigh the overall substantive fairness of the Reclassification to our unaffiliated shareholders and that the foregoing factors are outweighed by the positive factors previously described.

Our Board of Directors believes that the exchange of one share of Common Stock for one share of Class A Common Stock is fair to our unaffiliated shareholders who elect to receive shares of Class A Common Stock. In concluding that the one-for-one exchange ratio is fair to our unaffiliated shareholders, our Board of Directors considered the following factors:

·

With respect to the value placed on voting rights, the Board believes that the difference in value created from the Reclassification between the Common Stock with voting rights and the Class A Common Stock with limited voting rights is minimal because the holders of Common Stock whose shares may be converted into Class A Common Stock in the Reclassification currently own a minority of our shares, representing approximately 2.9% of the outstanding shares of Common Stock and voting rights. Conversely, the holders of our Common Stock whose shares will remain shares of Common Stock following the Reclassification currently own shares representing approximately 97.1% of the outstanding voting rights, so after the Reclassification, those holders of Common Stock will continue to control the votes cast on matters presented to the holders of Common Stock.

 

·

The Board’s belief that any potential decrease in value from the exchange of Common Stock for Class A Common Stock associated with the loss of voting rights (except in certain limited situations) is offset by holders of Class A Common Stock receiving a $0.03 per share premium on dividends paid to holders of Common Stock.

·

Our smaller shareholders who believe neither the one-for-one exchange ratio of their shares of Common Stock into Class A Common Stock nor the $12.75 per share is acceptable or fair to them, or otherwise prefer to remain holders of Common Stock after the Reclassification, may elect to do so by acquiring a sufficient number of shares so that they hold of record at least 300 shares of Common Stock immediately prior to the Reclassification.

·

Our shareholders who prefer to receive a premium on dividends in lieu of voting rights, may elect to do so by selling a sufficient number of shares so that they hold of record less than 300 shares of Common Stock immediately prior to the Reclassification and elect to receive shares of Class A Common Stock in the Reclassification.

Procedural Fairness

We believe that the Reclassification is procedurally fair to all of our unaffiliated shareholders. In concluding that the Reclassification, including the elections offered to choose to receive Class A Common Stock or $12.75 per share, is procedurally fair to our unaffiliated shareholders, our Board of Directors, on behalf of the Company, considered a number of factors.

The factors that our Board of Directors considered positive for all shareholders included the following:

·

the Reclassification is being effected in accordance with all applicable requirements of North Carolina law and the federal securities laws;

·

the Reclassification will require the affirmative votes of the record holders of a majority of the number of shares of Common Stock present and voting at the Annual Meeting;

·

because our Board members would be treated the same as our other shareholders in the Reclassification and no consideration had been given to the share cutoff number relative to the share ownership of the Board members, our Board did not form an independent special committee to evaluate the Reclassification, as the Board was able to adequately balance the competing interests of the shareholders in accordance with their fiduciary duties;

·

management and our Board considered alternative methods of effecting a transaction that would result in our becoming a non-SEC reporting company, each of which was determined to be impractical and more expensive than the Reclassification, involving a cash-out of certain of our shareholders, or potentially less attractive in achieving the goals of allowing shareholders to elect to retain the benefits of an ongoing economic interest in the Company while at the same time, eliminating the costs and burdens of public company status; and

 

·

shareholders will have the opportunity to determine whether or not they will remain shareholders owning solely Common Stock, or will own shares of Class A Common Stock or receive $12.75 per share, depending on the election made, after the Reclassification by acquiring sufficient shares (including by consolidating ownership of multiple accounts) so that they hold of record at least 300 shares of Common Stock immediately prior to the Reclassification or selling sufficient shares so that they hold of record less than 300 shares of Common Stock immediately prior to the Reclassification, so long as they act sufficiently in advance of the Reclassification so that the sale or purchase is reflected in our shareholder records by the close of business (local time) on ___________, 2016, the expected effective date of the Reclassification. (The last known bona fide trade price for our Common Stock was [$10.85] per share.)

Our Board of Directors considered each of the foregoing factors to weigh in favor of the procedural fairness of the Reclassification to all of our unaffiliated shareholders, whether they are receiving shares of Class A Common Stock or $12.75 per share, depending on the election made, or will continue to hold shares of Common Stock.

The Board is aware of, and has considered, the impact of the following potentially countervailing factors, which affect shareholders receiving Class A Common Stock, those electing to receive $12.75 per share and those continuing to own Common Stock to the same degree, on the procedural fairness of the Reclassification:

·

although the interests of shareholders receiving shares of Class A Common Stock or $12.75 per share in cash are different from the interests of shareholders continuing to own Common Stock and may create actual or potential conflicts of interest in connection with the reclassification transaction, neither the full Board nor any of the independent directors retained an independent, unaffiliated representative to act solely on behalf of the shareholders receiving shares of Class A Common Stock or cash, depending on the election made, for the purpose of negotiating the terms of the reclassification transaction or preparing a report concerning the fairness of the reclassification transaction; and

·

we did not solicit any other financial institutions to obtain their level of interest in acquiring the Company.

 

Our Board of Directors believes that the foregoing potentially countervailing factors did not, individually or in the aggregate, outweigh the overall procedural fairness of the Reclassification to our unaffiliated shareholders, whether they will be receiving shares of Class A Common Stock or $12.75 per share, or will continue to own shares of Common Stock, and the foregoing factors are outweighed by the procedural safeguards previously described. In particular, with reference to the lack of a special committee, the Board felt that the consideration of the Reclassification by the full Board, whose only conflicts of interest are (i) a relatively insignificant increase in aggregate beneficial ownership of the outstanding Common Stock following the reclassification transaction (equaling an increase of 0.9%, from 30.8% to 31.7% in total beneficial ownership for all directors and executive officers, excluding stock options and convertible Preferred Stock) and (ii) the fact that we expect that each of our directors, individually or together with his or her spouse, will own more than 300 shares of Common Stock at the effective time of the Reclassification and will, therefore, continue as holders of Common Stock if the Reclassification is approved, was a sufficient procedural safeguard that made it unnecessary to form a special committee or retain an independent fairness advisor.

In addition, our Board concluded that the fact that shareholders who elect to receive Class A Common Stock would continue to retain an ongoing economic interest in the Company and are required to receive the same consideration as the Common Stock in any merger, reclassification or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, and also would receive a $0.03 per share premium to holders of Common Stock in any payment of dividends by the Company, presented sufficient protection in value to such shareholders.

The Board also considered the difference in value between the Common Stock with voting rights and Class A Common Stock with limited or no voting rights not to be material since the holders of Common Stock whose shares would be converted into Class A Common Stock in the Reclassification currently beneficially own a small minority of our shares, or approximately 2.9% of the outstanding shares of Common Stock and voting rights, excluding stock options and convertible Preferred Stock. Conversely, the holders of the outstanding shares of Common Stock whose shares will continue as Common Stock after the Reclassification currently beneficially own shares representing approximately 97.1% of the outstanding voting rights, excluding stock options and convertible Preferred Stock, so after the Reclassification those holders of Common Stock will continue to control the shareholder vote of the Company as they do currently.

We therefore believe that the Reclassification is substantively and procedurally fair to all our shareholders, including our affiliated and unaffiliated shareholders whether they will retain Common Stock or will receive Class A Common Stock or $12.75 per share, for the reasons and factors described above. In reaching this determination, we have not assigned specific weights to particular factors, and we considered all factors as a whole. None of the factors that we considered led us to believe that the reclassification transaction is unfair to any of our shareholders.

Board Recommendation

Our Board of Directors believes the terms of the Reclassification is fair and in the best interests of our unaffiliated shareholders and unanimously recommends that you vote FOR the proposal to adopt the Amendment that will allow us to effect the Reclassification.

 

Opinion of Financial Advisor

 

---

1	Last 12 months ending as of September 30, 2015

Equity Research Services analyzed pricing multiples and financial ratios with respect to the selected peer group based on multiples of (i) book value, (ii) tangible book value, (iii) reported earnings for the last 12 months and (iv) core earnings for the last 12 months), and calculated the median, first quartile, and third quartile of such pricing ratios. The range of these four pricing multiples within the selected peer group as of January 15, 2016 was as follows:

		Price/Book Value (%)				Price/Tangible Book Value (%)				Price/LTM1 Earnings (x)				Price/LTM1 Core Earnings (x)
Median			102				103				11.0				11.4
Lower Quartile			97				97				10.1				10.6
Upper Quartile			103				108				14.4				14.5
Maximum			160				160				20.6				20.6
Minimum			76				76				8.8				9.3
Surrey Bancorp at $12.75 per share2			129				130				15.2				16.3

Discount Rates			Terminal Multiple of Earnings: 14x				Terminal Multiple of Earnings: 20x
12%			$	10.76			$	14.05
14%			$	10.05			$	13.09
16%			$	9.39			$	12.21
Surrey Bancorp at $12.75/share			$	12.75			$	12.75

Company		Announcement  Date		Assets ($ million)				Transaction Value				% of Shares				Premium
Neffs Bancorp		03/17/11			280			$	3,997,136				7.8	%			10.0	%
First BancTrust Corporation		04/08/08			340			$	305,569				1.2	%			22.0	%
First Bancorp of Indiana, Inc.		02/20/08			363			$	356,006				1.4	%			12.9	%
Peoples-Sidney Financial Corp		02/19/08			138			$	1,289,500				7.0	%			7.8	%
Clarkston Financial Corp.		01/10/08			201			$	957,300				7.5	%			38.0	%
Harbor Bankshares Corporation		05/12/06			251			$	386,818				1.8	%			17.0	%
Home City Financial Corporation		01/26/06			150			$	239,404				1.8	%			6.0	%
Median					251			$	386,818				1.8	%			12.9	%

Third party Sarbanes Oxley audits (report on internal controls)		$	11,200
Staff preparation of quarterly and annual reports			71,050
Staff training			2,000
Attorney fees related to regulatory reporting			8,500
Third party accounting fees related to regulatory reporting			35,250
Software expense			25,000
Shareholder communications			12,000
Other			5,000
		$	170,000

Description		Amount
Legal fees and expenses		$	35,000
Valuation fees and expenses		$	25,000
Accounting fees and expenses		$	2,000
Printing and mailing costs		$	8,000
Total		$	70,000

Date			Price				Shares			Name
03/15/2016				11.25				197		Edward C. Ashby, III
03/14/2016				11.00				850		Edward C. Ashby, III

Name of Shareholder		Shares Beneficially  Owned				Percent of Shares Beneficially  Owned
Betty Wright			429,907				11.68	%(1)
1234 Greenhill Road
Mount Airy, NC 27030
Tamra W. Thomas
660 Kingsbury Circle			472,301				13.31	%
Winston-Salem, NC 27106

Beneficial Owner		Common Stock beneficially owned(1)				Series A Preferred beneficially owned(2)				Series D  Preferred beneficially  owned(3)				Percent of Common Stock beneficially  owned(4)
Edward C. Ashby, III (director, President & CEO)			174,444				5,090				17,655				4.88	%
Elizabeth Johnson Lovill (director)			115,392				3,572				7,063				3.24	%
Robert H. Moody (Chairman)			130,258				7,786				7,200				3.64	%
Pedro A. Pequeno, II (Senior Vice President)			34,196				-0-				-0-				*
F. Eugene Rees (Vice Chairman)			140,624				11,000				14,125				3.91	%
Tamra W. Thomas (director)			472,301				-0-				-0-				13.31	%
Mark H. Towe (Senior Vice President and CFO)			17,476				-0-				-0-				*
Tom G. Webb (director)			85,357				1,800				7,063				2.40	%
Buddy E. Williams (director)			77,865				5,372				7,063				2.18	%
Directors and executive officers as a group (9 persons)			1,247,219				36,420				60,169				33.67	%

Name and age	Principal occupation over last five years
Edward C. Ashby, III, 62	President and Chief Executive Officer, Surrey Bancorp since 2003; President and Chief Executive Officer, Surrey Bank & Trust.
Elizabeth Johnson Lovill, 60	Vice President, Town & Country Builders, Inc. (residential construction); Owner, Lovill Enterprises (real estate development); Part owner, High Cotton Interiors, LLC (retail sales); all of Mount Airy, North Carolina.
Robert H. Moody, 61	President of Moody Funeral Services, Inc.; Partner, Moody Investment Co., LLC and DWM Properties, LLC (real estate); all of Mount Airy, North Carolina.
F. Eugene Rees, 64	President, F. Rees Company (retailer); Owner, Professional Rental Services, Inc.; Owner, REF Properties (commercial real estate development and management); Partner, Ingleside Development, LLC (residential real estate development); Partner, R&L Construction of Mount Airy, LLC (general contractor); all of Mount Airy, North Carolina.
Tamra W. Thomas, 63	Retired; former North Carolina public school teacher, Winston-Salem, NC.
Tom G. Webb, 64	Commercial Real Estate Developer; Owner-manager of Fairmont Associates, LLC and Westwood Partners, LLC (shopping centers); President, Mayberry RFD, Inc. (development management company); investor, Lewis Farms (vineyard financial investment); Board member, Old North State Winery, Inc.; advisor, Fabrica Development, Inc. (wholesale products supplier); and Parkway Associates, LLC (investment group dissolved in 2010); all of Mount Airy, North Carolina.
Buddy E. Williams, 78	President, Ten Oaks, LLC (hardwood floor manufacturing); Managing partner, Williams & Birkett, LLC (land acquisition and development); Managing partner, TGV Property, LLC (management of commercial and rental property); all of Stuart, Virginia.