SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549

                                   FORM 10-KSB


                ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2001                File Number 000-28037

                            FIRST SOUTH BANCORP, INC.
                 (Name of Small Business Issuer in its Charter)

              South Carolina                                   57-1086258
    (State or Other Jurisdiction of                          (IRS Employer
     Incorporation or  Organization)                      Identification Number)

        1450 John B. White, Sr., Blvd., Spartanburg, South Carolina 29306
                (Address of Principal Executive Office, Zip Code)

         Issuer's Telephone Number, Including Area Code: (864) 595-0455

        Securities Registered Pursuant to Section 12(b) of the Act: None

           Securities Registered Pursuant to Section 12(g) of the Act:
                           Common Stock, No Par Value
                                (Title of Class)

         Check whether the issuer (1) has filed all reports required to be filed
by  Section  13 or 15(d) of the  Exchange  Act during the past 12 months (or for
such shorter period that the Registrant was required to file such reports),  and
(2) has been subject to such filing  requirements  for the past 90 days.
Yes [X]   No [ ]

         Check if there is no  disclosure  of  delinquent  filers in response to
Item 405 of  Regulation  S-B contained in this form,  and no disclosure  will be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]

         The issuer's revenues for its most recent fiscal year were $10,099,566.

         The aggregate  market value of the Common Stock held by  non-affiliates
on February 28, 2002, was  approximately  $12,233,697.  As of February 28, 2002,
there  were  920,780  shares of the  Registrant's  Common  Stock,  no par value,
outstanding.  For purposes of the foregoing  calculation only, all directors and
executive officers of the Registrant have been deemed affiliates.

                       DOCUMENTS INCORPORATED BY REFERENCE

(1)  Portions of the Registrant's Proxy Statement for the 2002 Annual Meeting of
     Shareholders - Part III

Transitional Small Business Disclosure Format (check one): Yes [  ]  No [X]



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                                     PART I

Item 1.  Description of Business.

General

         First South Bancorp,  Inc.,  (the  "Company") is a bank holding company
with no operations other than those carried on by its  wholly-owned  subsidiary,
First South Bank (the "Bank").  The Company was organized in 1999 under the laws
of South  Carolina  for the purpose of becoming a holding  company for the Bank.
The Bank conducts a general banking  business under a state charter  approved by
the South Carolina State Board of Financial Institutions (the "State Board") and
granted by the Secretary of State of South  Carolina.  The Bank was organized in
1996.  The Bank  conducts  its  activities  from its main  office and one branch
office,  opened in 1997, in  Spartanburg,  South Carolina and a branch opened in
March, 2000 in Columbia, South Carolina.

         The Bank's business primarily consists of accepting deposits and making
loans.  The Bank seeks deposit  accounts from  households  and businesses in its
primary  market areas by offering a full range of savings  accounts,  retirement
accounts (including Individual Retirement  Accounts),  checking accounts,  money
market  accounts,  and time  certificates  of deposit.  It also makes  primarily
commercial,  real estate and installment loans, primarily on a secured basis, to
borrowers  in and around  Spartanburg  and  Richland  Counties  and makes  other
authorized  investments.  Mortgage  loans are  primarily  made for resale in the
secondary  market.  As of December 31, 2001,  the Bank  employed 34 persons on a
full time equivalent basis.

Competition

         The Bank competes  primarily in the South Carolina city of Spartanburg,
for which the most recent  market share data  available  is as of June 2001.  At
that time, in Spartanburg,  15 banks,  savings and loans, and savings banks with
53 branch  locations  competed for aggregate  deposits of  approximately  $1.783
billion.  The Bank has a  city-wide  deposit  market  share of 4.6% and a market
share rank of 8 out of the 15  competitors.  The bank also has one branch in the
city of Columbia,  South  Carolina  where its deposit  market share is less than
10%.

         Banks generally compete with other financial  institutions  through the
savings  products and services  offered,  the pricing of services,  the level of
service provided,  the convenience and availability of services,  and the degree
of expertise  and  personal  concern  with which  services  are offered.  In the
conduct of certain  areas of its business,  the Bank  competes  with  commercial
banks, credit unions,  consumer finance companies,  insurance  companies,  money
market  mutual  funds and other  financial  institutions,  some of which are not
subject to the same degree of regulation and restriction  imposed upon the Bank.
Many of these  competitors  have  substantially  greater  resources  and lending
limits than the Bank and offer certain services,  such as international  banking
services and trust services,  that the Bank does not provide.  Moreover, most of
these  competitors  have more numerous branch offices located  throughout  their
market areas,  a competitive  advantage  that the Bank does not have to the same
degree.

         The banking industry is significantly  affected by prevailing  economic
conditions as well as by government policies and regulations  concerning,  among
other things,  monetary and fiscal affairs,  the housing  industry and financial
institutions.  Deposits at banks are influenced by a number of economic factors,
including interest rates, competing  instruments,  levels of personal income and
savings,  and the extent to which interest on retirement savings accounts is tax
deferred.  Lending  activities  are  also  influenced  by a number  of  economic
factors,  including  demand  for  and  supply  of  housing,  conditions  in  the
construction  industry,  and availability of funds. Primary sources of funds for
lending  activities  include savings  deposits,  income from  investments,  loan
principal  repayments,   and  proceeds  from  sales  of  loans  to  conventional
participating lenders.

Effect of Government Regulation

         Bank  holding  companies  and banks  are  extensively  regulated  under
federal and state law. To the extent that the  following  information  describes
statutory  and  regulatory  provisions,  it is  qualified  in  its  entirety  by
reference to such  statutes and  regulations.  Any change in  applicable  law or
regulation  may have a material  effect on the  business  of the Company and the
Bank.

General

         As a bank holding  company under the Bank Holding Company Act ("BHCA"),
the  Company  obtained  the  approval of the Board of  Governors  of the Federal
Reserve System (the "Federal Reserve") to acquire the Bank and is subject to the


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regulations of the Federal Reserve. Under the BHCA, the Company's activities and
those of its subsidiaries are limited to banking, managing or controlling banks,
furnishing  services to or performing  services for its subsidiaries or engaging
in any other  activity  which the Federal  Reserve  determines  to be so closely
related to banking or managing or controlling  banks as to be a proper  incident
thereto. The Company may engage in a broader range of activities if it becomes a
"financial  holding company"  pursuant to the  Gramm-Leach-Bliley  Act, which is
described below under the caption "Recent  Legislation."  The BHCA prohibits the
Company  from  acquiring  direct  or  indirect  control  of more  than 5% of the
outstanding  voting stock or substantially all of the assets of any bank or from
merging or  consolidating  with  another  bank  holding  company  without  prior
approval of the Federal  Reserve.  Additionally,  the BHCA prohibits the Company
from engaging in or from  acquiring  ownership or control of more than 5% of the
outstanding voting stock of any company engaged in a non-banking business unless
such business is determined by the Federal  Reserve to be so closely  related to
banking as to be properly  incident  thereto.  The BHCA generally does not place
territorial   restrictions  on  the  activities  of  such  non-banking   related
activities.

         The Company is also subject to regulation and  supervision by the South
Carolina  State Board of Financial  Institutions  (the "State  Board").  A South
Carolina bank holding company must provide the State Board with information with
respect to the financial  condition,  operations,  management and  inter-company
relationships of the holding company and its subsidiaries.  The State Board also
may require such other information as is necessary to keep itself informed about
whether the  provisions  of South  Carolina law and the  regulations  and orders
issued  thereunder  by the State Board have been  complied  with,  and the State
Board may examine any bank holding company and its subsidiaries.

Obligations of the Company to its Subsidiary Bank

         A number of obligations  and  restrictions  are imposed on bank holding
companies  and their  depository  institution  subsidiaries  by Federal  law and
regulatory  policy that are designed to reduce  potential  loss  exposure to the
depositors of such  depository  institutions  and to the FDIC insurance funds in
the event the depository  institution  is in danger of becoming  insolvent or is
insolvent.  For example, under the policy of the Federal Reserve, a bank holding
company is required to serve as a source of financial strength to its subsidiary
depository  institutions and to commit resources to support such institutions in
circumstances  where it might not do so absent such  policy.  In  addition,  the
"cross-guarantee"  provisions of the Federal  Deposit  Insurance Act, as amended
("FDIA"),  require  insured  depository  institutions  under  common  control to
reimburse the FDIC for any loss suffered or reasonably anticipated by either the
Savings  Association  Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF")
of the  FDIC  as a  result  of the  default  of a  commonly  controlled  insured
depository  institution or for any assistance provided by the FDIC to a commonly
controlled  insured  depository  institution in danger of default.  The FDIC may
decline to enforce the cross-guarantee provisions if it determines that a waiver
is in the best  interest  of the SAIF or the BIF or both.  The FDIC's  claim for
damages  is  superior  to  claims  of  shareholders  of the  insured  depository
institution  or its holding  company but is subordinate to claims of depositors,
secured  creditors and holders of subordinated  debt (other than  affiliates) of
the commonly controlled insured depository institutions.

         The FDIA also provides that amounts  received from the  liquidation  or
other resolution of any insured  depository  institution by any receiver must be
distributed (after payment of secured claims) to pay the deposit  liabilities of
the  institution  prior to payment  of any other  general  or  unsecured  senior
liability,   subordinated  liability,  general  creditor  or  shareholder.  This
provision  would give  depositors  a preference  over  general and  subordinated
creditors  and  shareholders  in the event a receiver is appointed to distribute
the assets of the Bank.

         Any capital  loans by a bank holding  company to any of its  subsidiary
banks are  subordinate  in right of payment  to  deposits  and to certain  other
indebtedness of such subsidiary  bank. In the event of a bank holding  company's
bankruptcy,  any  commitment  by the bank  holding  company  to a  federal  bank
regulatory  agency to maintain the capital of a subsidiary  bank will be assumed
by the bankruptcy trustee and entitled to a priority of payment.

Capital Adequacy Guidelines for Bank Holding Companies and State Banks

         The various federal bank regulators,  including the Federal Reserve and
the FDIC have adopted  risk-based and leverage capital  adequacy  guidelines for
assessing bank holding company and bank capital adequacy. These standards define
what qualifies as capital and establish minimum capital standards in relation to
assets and off-balance sheet exposures, as adjusted for credit risks.

         Failure to meet capital  guidelines could subject the Bank to a variety
of enforcement  remedies,  including the termination of deposit insurance by the
FDIC and a prohibition on the taking of brokered deposits.



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         The risk-based  capital standards of both the Federal Reserve Board and
the FDIC explicitly identify  concentrations of credit risk and the risk arising
from non-traditional  activities,  as well as an institution's ability to manage
these risks,  as  important  factors to be taken into account by the agencies in
assessing an institution's overall capital adequacy. The capital guidelines also
provide that an institution's exposure to a decline in the economic value of its
capital  due to changes in interest  rates be  considered  by the  agencies as a
factor in evaluating a bank's capital  adequacy.  The Federal Reserve Board also
has recently issued  additional  capital  guidelines for bank holding  companies
that engage in certain trading activities.

         The Company and the Bank exceeded all applicable  capital  requirements
by a wide margin at December 31, 2001.

Payment of Dividends

         The  Company is a legal  entity  separate  and  distinct  from its bank
subsidiary.  Most of the  revenues of the  Company  are  expected to result from
dividends  paid to the Company by the Bank.  There are statutory and  regulatory
requirements  applicable to the payment of dividends by subsidiary banks as well
as by the Company to its  shareholders.  It is not anticipated  that the Company
will pay cash dividends in the near future.

Certain Transactions by the Company with its Affiliates

         Federal  law   regulates   transactions   among  the  Company  and  its
affiliates,  including  the  amount of the  Bank's  loans to or  investments  in
nonbank affiliates and the amount of advances to third parties collateralized by
securities of an affiliate.  Further,  a bank holding company and its affiliates
are prohibited  from engaging in certain tie-in  arrangements in connection with
any extension of credit, lease or sale of property or furnishing of services.

FDIC Insurance Assessments

         Because the Bank's deposits are insured by the BIF, the Bank is subject
to insurance assessments imposed by the FDIC. Currently, the assessments imposed
on all FDIC deposits for deposit insurance have an effective rate ranging from 0
to 27 basis points per $100 of insured deposits,  depending on the institution's
capital position and other supervisory  factors.  However,  because  legislation
enacted in 1996 requires that both  SAIF-insured and BIF-insured  deposits pay a
pro rata portion of the interest due on the obligations  issued by the Financing
Corporation  ("FICO"),  the FDIC is currently assessing  BIF-insured deposits an
additional 1.26 basis points per $100 of deposits,  and SAIF-insured deposits an
additional 6.30 basis points per $100 of deposits,  to cover those  obligations.
The FICO assessment will continue to be adjusted quarterly to reflect changes in
the assessment  bases of the respective funds based on quarterly Call Report and
Thrift Financial Report submissions.

Regulation of the Bank

         The Bank is subject to examination by the State Board. In addition, the
Bank is  subject  to  various  other  state and  federal  laws and  regulations,
including state usury laws,  laws relating to fiduciaries,  consumer credit laws
and laws relating to branch banking. The Bank's loan operations are also subject
to certain federal consumer credit laws and regulations  promulgated thereunder,
including,  but not  limited  to: the federal  Truth-In-Lending  Act,  governing
disclosures of credit terms to consumer borrowers;  the Home Mortgage Disclosure
Act, requiring financial  institutions to provide certain information concerning
their mortgage  lending;  the Equal Credit  Opportunity Act and the Fair Housing
Act,  prohibiting  discrimination on the basis of certain  prohibited factors in
extending credit; the Fair Credit Reporting Act, governing the use and provision
of information to credit reporting agencies; the Bank Secrecy Act, dealing with,
among other things, the reporting of certain currency transactions; and the Fair
Debt  Collection  Act,  governing  the  manner  in which  consumer  debts may be
collected by collection  agencies.  The deposit  operations of the Bank are also
subject to the Truth in Savings Act,  requiring certain  disclosures about rates
paid on savings accounts; the Expedited Funds Availability Act, which deals with
disclosure of the availability of funds deposited in accounts and the collection
and return of checks by banks; the Right to Financial Privacy Act, which imposes
a duty to maintain certain confidentiality of consumer financial records and the
Electronic  Funds Transfer Act and  regulations  promulgated  thereunder,  which
govern  automatic   deposits  to  and  withdrawals  from  deposit  accounts  and
customers'  rights and  liabilities  arising  from the use of  automated  teller
machines and other electronic banking services.

         The  Bank  is  also  subject  to  the  requirements  of  the  Community
Reinvestment  Act (the  "CRA").  The CRA imposes on  financial  institutions  an
affirmative  and  ongoing  obligation  to meet the credit  needs of their  local
communities,  including low- and moderate-income neighborhoods,  consistent with


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the safe and sound operation of those institutions. Each financial institution's
actual performance in meeting community credit needs is evaluated as part of the
examination process, and also is considered in evaluating mergers,  acquisitions
and applications to open a branch or facility.

Other Safety and Soundness Regulations

         Prompt  Corrective  Action.  The federal  banking  agencies  have broad
powers under  current  federal law to take prompt  corrective  action to resolve
problems of insured depository institutions.  The extent of these powers depends
upon whether the  institutions in question are "well  capitalized,"  "adequately
capitalized,"    "undercapitalized,"    "significantly    undercapitalized"   or
"critically undercapitalized."

         A bank that is "undercapitalized"  becomes subject to provisions of the
FDIA:   restricting  payment  of  capital  distributions  and  management  fees;
requiring the FDIC to monitor the condition of the bank; requiring submission by
the bank of a capital  restoration  plan;  restricting  the growth of the bank's
assets and requiring prior approval of certain expansion proposals.  A bank that
is  "significantly   undercapitalized"   is  also  subject  to  restrictions  on
compensation  paid  to  senior  management  of  the  bank,  and a bank  that  is
"critically   undercapitalized"  is  further  subject  to  restrictions  on  the
activities of the bank and restrictions on payments of subordinated  debt of the
bank.  The  purpose  of these  provisions  is to  require  banks  with less than
adequate  capital to act quickly to restore  their  capital and to have the FDIC
move  promptly  to take over  banks  that are  unwilling  or unable to take such
steps.

         Brokered Deposits.  Under current FDIC regulations,  "well capitalized"
banks may accept brokered deposits without restriction, "adequately capitalized"
banks may accept  brokered  deposits  with a waiver  from the FDIC  (subject  to
certain  restrictions on payment of rates), while  "undercapitalized"  banks may
not accept brokered  deposits.  The regulations  provide that the definitions of
"well capitalized", "adequately capitalized" and "undercapitalized" are the same
as the  definitions  adopted by the agencies to implement the prompt  corrective
action  provisions  described in the  previous  paragraph.  Management  does not
believe  that  these  regulations  will have a  material  adverse  effect on the
operations of the Bank.

Interstate Banking

         Under the Riegle-Neal  Interstate Banking and Branching  Efficiency Act
of 1994 the Company and any other  adequately  capitalized  bank holding company
located in South  Carolina can acquire a bank located in any other state,  and a
bank  holding  company  located  outside  South  Carolina  can acquire any South
Carolina-based  bank, in either case subject to certain  deposit  percentage and
other restrictions.  Unless prohibited by state law, adequately  capitalized and
managed bank holding  companies are permitted to  consolidate  their  multistate
bank operations into a single bank subsidiary and to branch  interstate  through
acquisitions. De novo branching by an out-of-state bank is permitted only if the
laws of the host state expressly permit it. The authority of a bank to establish
and operate  branches within a state continue to be subject to applicable  state
branching  laws.  South  Carolina law was amended,  effective  July 1, 1996,  to
permit such  interstate  branching but not de novo branching by an  out-of-state
bank.

Gramm-Leach-Bliley Act

         On November 12, 1999, the President signed the Gramm-Leach-Bliley  Act,
which  makes it easier for  affiliations  between  banks,  securities  firms and
insurance companies to take place. The Act removes Depression-era  barriers that
had separated  banks and securities  firms,  and seeks to protect the privacy of
consumers' financial information.

         Under provisions of the new legislation, which were effective March 11,
2000, and regulations adopted by the appropriate  regulators,  banks, securities
firms and insurance  companies are able to structure new affiliations  through a
holding  company  structure or through a financial  subsidiary.  The legislation
creates a new type of bank holding company called a "financial  holding company"
which has powers much more extensive than those of standard  holding  companies.
These  expanded  powers include  authority to engage in "financial  activities,"
which are  activities  that are (1)  financial  in  nature;  (2)  incidental  to
activities  that are financial in nature;  or (3)  complimentary  to a financial
activity and that do not impose a safety and soundness risk. Significantly,  the
permitted financial activities for financial holding companies include authority
to engage in merchant  banking and  insurance  activities,  including  insurance
portfolio  investing.  A bank holding company can qualify as a financial holding
company  and  expand  the  services  it  offers  only  if all of its  subsidiary
depository  institutions are well-managed,  well-capitalized and have received a
rating of "satisfactory" on their last Community Reinvestment Act examination.



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         The  legislation  also  creates  another  new type of  entity  called a
"financial subsidiary." A financial subsidiary may be used by a national bank or
a group of national banks to engage in many of the same activities permitted for
a financial holding company, though several of these activities,  including real
estate development or investment,  insurance or annuity underwriting,  insurance
portfolio  investing and merchant  banking,  are reserved for financial  holding
companies.  A bank's  investment  in a financial  subsidiary  affects the way in
which the bank calculates its regulatory capital, and the assets and liabilities
of financial  subsidiaries  may not be consolidated  with those of the bank. The
bank must also be certain that its risk  management  procedures  are adequate to
protect it from  financial and  operational  risks created both by itself and by
any financial subsidiary.  Further, the bank must establish policies to maintain
the separate corporate  identities of the bank and its financial  subsidiary and
to prevent each from becoming liable for the obligations of the other.

         The Act also  establishes  the  concept  of  "functional  supervision,"
meaning that  similar  activities  should be  regulated  by the same  regulator.
Accordingly,  the Act spells out the regulatory authority of the bank regulatory
agencies,  the Securities and Exchange Commission and state insurance regulators
so that each type of activity is  supervised by a regulator  with  corresponding
expertise.  The Federal  Reserve Board is intended to be an umbrella  supervisor
with the  authority  to  require a bank  holding  company or  financial  holding
company  or any  subsidiary  of  either  to  file  reports  as to its  financial
condition,  risk management  systems,  transactions with depository  institution
subsidiaries  and  affiliates,  and compliance  with any federal law that it has
authority to enforce.

         Although the Act reaffirms that states are the regulators for insurance
activities  of  all  persons,  including   federally-chartered  banks,  the  Act
prohibits  states from preventing  depository  institutions and their affiliates
from conducting insurance activities.

         The Act also  establishes  a minimum  federal  standard  of  privacy to
protect the confidentiality of a consumer's  personal financial  information and
gives the consumer the power to choose how personal financial information may be
used by  financial  institutions.  The privacy  provisions  of the Act have been
implemented by adoption of regulations by various federal agencies.

         The  Company  anticipates  that  the Act and  the  regulations  adopted
pursuant to the Act will be likely to create new  opportunities  for it to offer
expanded  services to  customers  in the future,  though the Company has not yet
determined what the nature of the expanded services might be or when the Company
might find it feasible to offer them. The Company  further  expects that the Act
will increase competition from larger financial  institutions that are currently
more capable than the Company of taking  advantage of the opportunity to provide
a broader range of services.  However, the Company continues to believe that its
commitment to providing  high quality,  personalized  service to customers  will
permit it to remain competitive in its market area.

Legislative Proposals

         New proposed  legislation which could significantly affect the business
of banking has been  introduced  or may be  introduced  in Congress from time to
time.  Management  of  the  Bank  cannot  predict  the  future  course  of  such
legislative proposals or their impact on the Company and the Bank should they be
adopted.

Fiscal and Monetary Policy

         Banking is a business  which depends to a large extent on interest rate
differentials. In general, the difference between the interest paid by a bank on
its deposits and its other  borrowings,  and the interest  received by a bank on
its loans and  securities  holdings,  constitutes  the major portion of a bank's
earnings.  Thus, the earnings and growth of the Company and the Bank are subject
to the influence of economic  conditions  generally,  both domestic and foreign,
and also to the  monetary  and  fiscal  policies  of the  United  States and its
agencies,  particularly the Federal Reserve.  The Federal Reserve  regulates the
supply of money through various means,  including open market dealings in United
States government  securities,  the discount rate at which banks may borrow from
the Federal Reserve,  and the reserve  requirements on deposits.  The nature and
timing of any changes in such  policies  and their impact on the Company and the
Bank cannot be predicted.

Item 2.  Description of Property.

         The Bank owns the real  property  at 1450 John B.  White,  Sr.,  Blvd.,
Spartanburg, South Carolina, where its main offices are located. The Bank leases
the property at 1035 Fernwood Glendale Road, Spartanburg, South Carolina, and at
1333 Main  Street,  Columbia,  South  Carolina,  where its  branch  offices  are
located,  under long term leases.  All properties are believed to be well suited
for the Bank's needs.



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Item 3.  Legal Proceedings.

         The Bank is from  time to time a party  to  various  legal  proceedings
arising in the ordinary  course of business,  but  management of the Bank is not
aware  of  any  pending  or  threatened   litigation  or  unasserted  claims  or
assessments  that are  expected  to  result in  losses,  if any,  that  would be
material to the Bank's business and operations.

Item 4.  Submission of Matters to Vote of Security Holders.

         No matters  were  submitted  to a vote of security  holders  during the
fourth quarter of 2000.

                                     PART II

Item 5.  Market for Common Equity and Related Shareholder Matters.

         Although the common stock of the Company is traded from time to time on
an individual  basis,  no  established  trading market has developed and none is
expected to develop in the foreseeable future. The common stock is not traded on
any exchange or on the NASDAQ National  Market System,  nor are there any market
makers  known  to  management.  During  2001,  management  was  aware  of a  few
transactions  in which the Company's  common stock traded in a range from $17.63
to  $21.00  per  share.  However,  management  has not  ascertained  that  these
transactions  are the result of arm's length  negotiations  between the parties,
and because of the limited  number of shares  involved,  these prices may not be
indicative of the market value of the common stock.

         As of February 15, 2002, there were approximately 576 holders of record
of the Company's  common stock,  excluding  individual  participants in security
position listings.

         The  Company  has never paid any cash  dividends,  and to  support  its
continued  capital  growth,  does not expect to pay cash  dividends  in the near
future.  The dividend  policy of the Company is subject to the discretion of the
Board of  Directors  and depends upon a number of factors,  including  earnings,
financial  conditions,  cash needs and general business  conditions,  as well as
applicable regulatory  considerations.  At present, the Company's only source of
funds with which it could pay  dividends  is  dividend  payments  from the Bank.
South Carolina  banking  regulations  restrict the amount of cash dividends that
can  be  paid  to  shareholders,  and  all  of  the  Bank's  cash  dividends  to
shareholders   are  subject  to  the  prior   approval  of  the  South  Carolina
Commissioner of Banking.

         During  2001,  the Company  issued  2,024 shares of its common stock to
directors of the Company in lieu of paying cash director's fees of $40,669.  The
issuances  were  exempt  from  registration  pursuant  to  Section  4(2)  of the
Securities Act of 1933 because they did not involve any public offering.

Item 6.  Management's Discussion and Analysis or Plan of Operation.

         This  discussion is intended to assist in  understanding  the financial
condition  and  results  of  operations  of the  Company,  and should be read in
conjunction with the financial  statements and related notes contained elsewhere
herein. Because the Bank is responsible for all of the Company's operations, the
discussion will refer to the results of operations of the Bank.

Earnings Performance

         The Bank had net income from operations for the year ended December 31,
2001, of $905,835, or $0.99 per share, compared to net income for the year ended
December  31,  2000,  of  $781,730 or $0.85 per common  share.  The Bank had net
interest income (the  difference  between  interest  earned on interest  earning
assets and interest paid on interest  bearing  liabilities)  of  $4,533,314  for
2001,  as compared to  $3,899,907  for 2000.  The Bank also had other  operating
income (principally  service charges,  fees and commissions) of $431,246 in 2001
and $283,897 in 2000.  The Bank provided  $445,853 and $254,855 to its allowance
for loan losses in 2001 and 2000, respectively, and had other operating expenses
(principally  salaries and benefits and  occupancy  and  equipment  expenses) of
$3,198,297 in 2001, and $2,782,755 in 2000.

Net Interest Income

         Net  interest  income is the  amount  of  interest  earned on  interest
earning assets (loans,  investment securities,  time deposits in other banks and
federal funds sold),  less the interest  expenses  incurred on interest  bearing
liabilities (interest bearing deposits and borrowed money), and is the principal
source of the Bank's  earnings.  Net interest income is affected by the level of


                                       7
<Page>

interest rates,  volume and mix of interest  earning assets and interest bearing
liabilities and the relative funding of these assets.

         During  the year ended  December  31,  2000,  net  interest  income was
$3,899,907.  For the year ended  December  31,  2001,  net  interest  income was
$4,533,314.  The increase was primarily attributable to an increase in volume as
average  interest  earning assets  increased 33.5% and average  interest bearing
liabilities  increased  33.3% from 2000 to 2001.  The average  yield on interest
earning  assets  decreased  from  9.63% to 7.98%  from  2000 to 2001,  while the
average cost of interest bearing liabilities decreased from 6.08% to 4.85%. As a
result, the net yield on average interest earning assets decreased from 4.30% in
2000 to 3.74% in 2001.

         The table  "Average  Balances,  Yields and Rates,"  provides a detailed
analysis of the effective yields and rates on the categories of interest earning
assets and interest  bearing  liabilities  for the years ended December 31, 2001
and 2000.

<Table>
<Caption>
                                                                                 Average Balances, Yields and Rates
                                                                                       (Dollars in Thousands)
                                                                                      Year Ended December 31,
                                                                                      -----------------------
                                                                              2001                                2000
                                                                              -----                               ----
                                                                              Interest                             Interest
                                                                  Average     Income/   Yields/       Average     Income/   Yields/
                                                                Balances(1)   Expense    Rates      Balances(1)   Expense    Rates
                                                                -----------   -------    -----      -----------   -------    -----
Assets
<S>                                                                 <C>          <C>        <C>          <C>          <C>     <C>
Federal funds sold ..........................................       $     17         1      5.88%            243         15    6.17%
Due From banks - Interest-bearing ...........................          4,556       177      3.89%          7,598        491    6.46%
Investment securities .......................................         14,192       894      6.30%         11,887        709    5.96%
Loans (2) ...................................................        102,333     8,596      8.40%         70,980      7,521   10.60%
  Total interest earning assets .............................        121,098     9,668      7.98%         90,708      8,736    9.63%
Cash and due from banks .....................................          2,305                               1,675
Valuation reserve for investment securities .................            124                               (308)
Allowance for loan losses ...................................        (1,234)                               (918)
Premises and equipment ......................................          2,843                               2,962
Other assets ................................................          2,330                               2,171
                                                                    --------                             -------
  Total assets ..............................................       $127,466                             $96,290
                                                                    ========                             =======
Liabilities and shareholders' equity
  Interest bearing transaction accounts .....................       $ 23,683       857      3.62%         19,927      1,059    5.31%
  Savings ...................................................          2,750        66      2.40%          2,072         85    4.10%
  Time deposits $100,000 and over ...........................         14,721       872      5.92%         15,780      1,016    6.44%
  Other time deposits .......................................         51,314     2,826      5.51%         39,477      2,554    6.47%
                                                                    --------    ------                   -------     ------
    Total interest bearing deposits .........................         92,468     4,621      5.00%         77,256      4,714    6.10%
Retail repurchase agreements ................................          4,617       123      2.66%          1,766         96    5.44%
Other Borrowed Funds ........................................          8,875       391      4.41%            458         26    5.68%
                                                                    --------    ------                   -------     ------
    Total interest bearing liabilities ......................        105,960     5,135      4.85%         79,480       4836    6.08%
Noninterest bearing demand deposits .........................          7,864                               4,415
Other liabilities ...........................................          1,149                               1,076
Shareholders' equity ........................................         12,493                              11,319
                                                                    --------                             -------
  Total liabilities and  shareholders' equity ...............       $127,466                             $96,290
                                                                    ========                             =======
Interest rate spread (3) ....................................                               3.13%                              3.55%
Net interest income and net yield on earning ................                    4,533      3.74%                     3,900    4.30%
assets (4)
Interest free funds
  supporting earning assets (5) .............................       $ 15,138                             $11,228
</Table>
(1)  Average balances are computed on a daily basis.
(2)  Nonaccruing  loans are included in the average loan  balances and income on
     such loans is  recognized  on a cash basis and excludes  impact of deferred
     loan origination fees.
(3)  Total  interest  earning  assets  yield  less the  total  interest  bearing
     liabilities rate.


                                       8
<Page>

(4)  Net interest income divided by total interest earning assets.
(5)  Total interest earning assets less total interest bearing liabilities.

Rate/Volume Analysis of Net Interest Income

         The  effect  of  changes  in  average  balances  (volume)  and rates on
interest  income,  interest  expense and net  interest  income,  for the periods
indicated,  is shown below.  The effect of a change in average  balance has been
determined  by applying the average rate in the earlier  period to the change in
average balance in the later period,  as compared with the earlier  period.  The
effect of a change in the  average  rate has been  determined  by  applying  the
average  balance in the earlier  period to the change in the average rate in the
later  period,  as compared  with the earlier  period.  Changes  resulting  from
average balance/rate variances are included in changes resulting from volume.

                                                 Year Ended December 31,
                                                  2001compared to 2000
                                                Increase (Decrease) Due to
                                                --------------------------
                                                   (Dollars in Thousands)
                                             Volume          Rate          Total
                                             ------          ----          -----
Interest earned on:
  Investments ...........................     $   138           47          185
  Overnight Investments .................        (211)        (117)        (328)
  Net Loans .............................       3,325       (2,250)       1,075
                                              -------      -------      -------

Total Interest Income ...................       3,252       (2,320)         932
                                              -------      -------      -------

Interest paid on:
  Interest Checking .....................         199         (401)        (202)
  Savings Deposits ......................          28          (47)         (19)
  Time Deposits $100,000 and over .......         (62)         (82)        (144)
  Other time deposits ...................         758         (486)         272

  Retail Repurchase Agreements ..........         155         (128)          27
  Other Borrowed Funds ..................         478         (113)         365
                                              -------      -------      -------

Total Interest Expense ..................       1,556       (1,257)         299
                                              -------      -------      -------

Change in Net Interest Income ...........     $ 1,696       (1,063)         633
                                              =======      =======      =======

         During the year 2002 management expects that interest rates will remain
fairly stable.  Therefore,  any improvements in net interest income for 2002 are
expected to be largely the result of  increases in the volume and changes in the
mix of interest earning assets and liabilities.  Management  expects to continue
to use aggressive  marketing  strategies to increase the Bank's market share for
both  deposits and quality  loans within its service  areas in  Spartanburg  and
Columbia,  South Carolina. These strategies involve offering attractive interest
rates and continuing  the Bank's  commitment to providing  outstanding  customer
service.

Interest Rate Sensitivity

         Interest rate  sensitivity  management is concerned with the timing and
magnitude of repricing  assets  compared to liabilities and is an important part
of asset/liability  management. It is the objective of interest rate sensitivity
management to generate stable growth in net interest income,  and to control the
risks  associated  with interest rate movement.  Management  constantly  reviews
interest rate risk exposure and the expected  interest rate  environment so that
timely adjustments in interest rate sensitivity can be made.

         The  table,  "Interest  Sensitivity  Analysis",  indicates  that,  on a
cumulative  basis through twelve months,  rate  sensitive  assets  exceeded rate
sensitive liabilities,  resulting in an asset sensitive position at December 31,
2001 of $15.2  million  for a  cumulative  gap  ratio of  1.14%.  When  interest
sensitive  liabilities exceed interest sensitive assets for a specific repricing
"horizon", a negative interest sensitivity gap results. The gap is positive when
interest sensitive assets exceed interest sensitive liabilities, as was the case
at December 31, 2001 with respect to the one year time horizon.  For a bank with
a positive gap,  such as the Bank,  rising  interest  rates would be expected to
have a  positive  effect on net  interest  income  and  falling  rates  would be
expected to have the opposite effect.



                                       9
<Page>

         The table below  reflects the balances of interest  earning  assets and
interest  bearing  liabilities  at the  earlier of their  repricing  or maturity
dates.  Amounts  of fixed  rate  loans are  reflected  at the  earlier  of their
contractual  maturity  date or the  date at  which  the  loans  may be  repriced
contractually.  Time  deposits in other  banks are  reflected  in the  deposits'
maturity dates.  Repurchase agreements and other borrowed funds are reflected in
the earliest  contractual  repricing  interval due to the immediately  available
nature  of  these  funds.  Interest  bearing  liabilities  with  no  contractual
maturity,  such as interest bearing  transaction  accounts and savings deposits,
are reflected in the earliest repricing interval due to contractual arrangements
which give  management the  opportunity to vary the rates paid on these deposits
within a thirty day or shorter period.  However, the Bank is under no obligation
to vary the rates paid on those  deposits  within any given  period.  Fixed rate
time  deposits are reflected at their  contractual  maturity  dates.  Fixed rate
advances are reflected at their  contractual  maturity dates,  and variable rate
advances  are  reflected  in the  earliest  repricing  interval  since they were
borrowed  under the daily  rate  credit  option,  and  reprice  daily.  Loans on
nonaccrual status, totaling $396,000, are excluded from this table.

                          Interest Sensitivity Analysis

<Table>
<Caption>
                                                                                       December 31, 2001
                                                                 Within          4-12        Over 1-5         Over 5
                                                                3 Months        Months        Years           Years          Total
                                                                --------        ------       --------         ------         -----
                                                                                    (Dollars in thousands)
Interest earning assets
<S>                                                            <C>            <C>             <C>            <C>            <C>
   Interest-bearing deposits in other banks .............      $  3,400       $      0        $      0       $      0       $  3,400
   Other investments (Book Value) .......................         3,000              0           4,500          2,573         10,073
   Loans
      Fixed rate ........................................         5,272          3,700           4,488          2,365         15,825
      Variable rate .....................................       109,945              0               0              0        109,945
                                                               --------       --------        --------       --------       --------
        Total interest earning assets ...................      $121,617       $  3,700        $  8,988       $  4,938       $139,243

Interest bearing liabilities
   Interest bearing deposits
      Interest bearing transaction accounts .............        25,807              0               0              0         25,807
      Savings & MMIA ....................................         2,771              0               0              0          2,771
      Time deposits $100,000 and over ...................        10,759          3,629             559              0         14,947
      Other time deposits ...............................        20,753         41,121           2,154              0         64,028
        Total interest bearing deposits .................        60,090         44,750           2,713              0        107,553
      Repurchase agreements .............................         5,209              0               0              0          5,209
      Other borrowed Funds ..............................            41              0               0         10,000         10,041
                                                               --------       --------        --------       --------       --------
        Total interest bearing liabilities ..............      $ 65,340       $ 44,750        $  2,713       $ 10,000       $122,803

Interest sensitivity gap ................................      $ 56,277       $(41,050)       $  6,275       $ (5,062)
Cumulative interest sensitivity gap .....................      $ 56,277       $ 15,227        $ 21,502       $ 16,440
Gap ratio ...............................................          1.86%           .08%           3.31%
Cumulative gap ratio ....................................          1.86%          1.14%           1.19%
</Table>

Provision for Loan Losses

         The allowance for loan losses,  established  through charges to expense
in the form of a provision for loan losses,  allows for loan losses  inherent in
the Bank's loan  portfolio.  Loan losses or  recoveries  are charged or credited
directly to the  allowance.  The level of the allowance for loan losses is based
on  management's  judgment as to the amount  required  to maintain an  allowance
adequate  enough to provide for such  losses.  The Bank  provided  $445,853  and
$254,855 to the  allowance  during the years ended  December  31, 2001 and 2000,
respectively. The increase primarily resulted from the increase in the amount of
loans outstanding.

Other Expenses

         Other  expenses,  which  consist  primarily  of salaries  and  employee
benefits,  net occupancy,  and data processing expenses,  totaled $3,198,297 for
the year ended  December 31, 2001 as compared to  $2,782,755  for the year ended
December  31, 2000.  As a percentage  of total  operating  income (net  interest
income after provision for loan losses plus total other operating income), other
expenses, remained constant from 2000 to 2001 at 70.8%.


                                       10
<Page>

Income Taxes

         During the year ended December 31, 2000, the Bank accrued  $460,464 for
income taxes.  The Bank accrued  $612,575 for income taxes during 2001. The Bank
accounts for income  taxes under SFAS No. 109,  "Accounting  for Income  Taxes."
Certain  items of income and expense  (principally  provision  for loan  losses,
depreciation, and pre-opening expenses) are included in one reporting period for
financial  accounting  purposes  and  another  for  income tax  purposes.  These
accounting  timing  differences  resulted  in a deferred  income tax  benefit of
$198,000 being recognized in 2001 and $96,000 being recognized in 2000.

Investment Portfolio

         As of December  31, 2001,  the Bank's  investment  portfolio  comprised
approximately  7.0 % of its total assets.  The following  table  summarizes  the
carrying  value amounts of securities  held by the Bank at December 31, 2001 and
at December 31, 2000.

                        Securities Portfolio Composition

<Table>
<Caption>
                                                                December 31, 2001                      December 31, 2000
                                                        ----------------------------------     -----------------------------------
                                                                       Net                                   Net
                                                                    Unrealized                            Unrealized
                                                           Book      Holding      Fair           Book      Holding       Fair
                                                          Value    Gain/(Loss)    Value          Value   Gain/(Loss)     Value
                                                          -----    -----------    -----          -----   -----------     -----
                                                                                     (Dollars in thousands)
Available for sale:
<S>                                                     <C>          <C>           <C>          <C>           <C>           <C>
    U. S. Government agency obligations ...........     $  8,000     $    181      $  8,181     $ 12,000      $     (4)     $ 11,996
    State and local obligations ...................          123           (3)          120          123            (1)          122
    Restricted FHLB Stock .........................          600            -           600          163             -           163
                                                        --------     --------      --------     --------      --------      --------
                                                        $  8,723     $    178      $  8,901     $ 12,286      $     (5)     $ 12,281
                                                        ========     ========      ========     ========      ========      ========
Held for investment:
    U.S. Government Agency obligations ............          500           29           529        3,500            37         3,537
    Trust Preferred securities ....................          475           62           537          474            44           518
    State and local obligations ...................     $    375            1      $    376     $    375             3      $    378
                                                        --------     --------      --------     --------      --------      --------
                                                        $  1,350     $     92      $  1,442     $  4,349      $     84      $  4,433
                                                        ========     ========      ========     ========      ========      ========
</Table>

         The following table presents  maturities and weighted average yields of
debt securities at December 31, 2001.  Available-for-sale  securities are stated
at  estimated  fair  value  and held for  investment  securities  are  stated at
amortized cost.
                   Securities Portfolio Maturities and Yields

<Table>
<Caption>
                                                                                          December 31, 2001
                                                                                          -----------------
                                                                    Available                            Held for
                                                                     For Sale            Yield           Investment          Yield
                                                                     --------            -----           ----------          -----
U.S. Government Agency Obligations .......................                                (Dollars in thousands)
<S>                                                                  <C>                 <C>               <C>              <C>
         Due in one year or less .........................           $3,013              5.00%
         Due from one to five years ......................            4,137              6.25%             $  500            6.75%
         Due from five to ten years ......................            1,031              6.00%
                                                                     ------                                ------
                                                                      8,181              5.76%             $  500            6.75%
State and local obligations(1)
         Due after ten years .............................              120              5.00%                375            5.25%
Trust Preferred securities
         Due after ten years .............................                                                    474           10.38%

Total(2)
         Due in one year or less .........................            3,013
         Due from one to five years ......................            4,137                                  500
         Due from five to ten years ......................            1,031
         Due after ten years .............................              120                                  850
</Table>
--------------------------
(1)      Not adjusted for tax equivalency.
(2)      Equity Securities Omitted



                                       11
<Page>


Loan Portfolio

         Management believes the loan portfolio is adequately diversified. There
are no  significant  concentrations  of loans in any  particular  individuals or
industry or group of related individuals or industries, and there are no foreign
loans.

         The amount of loans  outstanding  at December 31, 2001,  and 2000,  are
shown in the following table according to type of loan:

                                             Loan Portfolio Composition


                                                           December 31,
                                                           ------------
                                                     2001              2000
                                                     ----              ----

Commercial, financial and agricultural .....    $  36,270,381     $  23,755,686
Real estate - construction .................       13,097,957        11,349,351
Real estate mortgage .......................       76,168,473        47,272,549
Consumer ...................................          629,235           460,842
                                                -------------     -------------
    Total loans ............................      126,166,046        82,838,428

Less allowance for loan losses .............       (1,450,000)       (1,055,000)
                                                -------------     -------------

                                                $ 124,716,046     $  81,783,428
                                                =============     =============

Maturity Distribution of Loans

         The following table sets forth the maturity  distribution of the Bank's
loans,  by type,  as of  December  31,  2001,  as well as the  type of  interest
requirement on such loans.

                         Maturity Distribution on Loans

<Table>
<Caption>
                                                                                                December 31, 2001
                                                                                                -----------------
                                                                             1 Year           1-5           5 Years
                                                                             or Less          Years         or More          Total
                                                                             -------          -----         -------          -----
                                                                                     (Dollars in Thousands)

<S>                                                                         <C>             <C>             <C>             <C>
Commercial and industrial ..........................................        $ 20,544        $ 15,538        $    730        $ 36,812
Real Estate-construction ...........................................           4,025           6,640           5,020          15,685
Real Estate-mortgage ...............................................          18,613          42,926          11,564          73,103
Consumer installment ...............................................             412             399              25             566
      Total ........................................................        $ 43,324        $ 65,503        $ 17,399        $126,166
                                                                            ========        ========        ========        ========

Predetermined rate, maturity greater than one year .................        $      0        $  4,488        $  2,365        $  6,853
                                                                            ========        ========        ========        ========

Variable rate or maturity within one year ..........................        $ 34,012        $ 61,015        $ 14,974        $110,001
                                                                            ========        ========        ========        ========
</Table>

         A certain degree of risk taking is inherent in the extension of credit.
Management has established loan and credit policies designed to control both the
types and  amounts of risks  assumed and to  ultimately  minimize  losses.  Such
policies include limitations on  loan-to-collateral  values for various types of
collateral,  requirements for appraisals of real estate collateral, problem loan
management  practices and collection  procedures,  and nonaccrual and charge-off
guidelines.

         Commercial loans primarily represent loans made to businesses,  and may
be made on  either a secured  or an  unsecured  basis.  When  taken,  collateral
consists  of  liens  on  receivables,   equipment,  inventories,  furniture  and
fixtures.  Unsecured  business loans are generally  short-term  with emphasis on
repayment  strengths and low debt to worth ratios.  Commercial  lending involves
significant risk because  repayment  usually depends on the cash flows generated
by a  borrower's  business,  and the debt  service  capacity  of a business  can
deteriorate because of downturns in national and local economic  conditions.  To


                                       12
<Page>

control  risk,  initial  and  continuing  financial  analysis  of  a  borrower's
financial information is required.

         Real estate  construction  loans  generally  consist of  financing  the
construction  of 1-4 family  dwellings  and some  nonfarm,  nonresidential  real
estate.  Usually, loan to cost ratios are limited to 75% and permanent financing
commitments are required prior to the advancement of loan proceeds.

         Loans secured by real estate  mortgages  comprised  nearly 70.7% of the
Bank's loan  portfolio  at December  31,  2001.  Residential  real estate  loans
consist mainly of first and second  mortgages on single family homes,  with some
multifamily  loans.  Loan-to-value  ratios for these  instruments  are generally
limited  to 90%.  Nonfarm,  nonresidential  loans are  secured by  business  and
commercial  properties with  loan-to-value  ratios generally limited to 80%. The
repayment  of both  residential  and  business  real estate  loans is  dependent
primarily  on the income and cash flows of the  borrowers,  with the real estate
serving as a secondary or liquidation source of repayment.

Nonperforming Loans; Other Problem Assets

         When a loan is 90 days past due as to interest or principal or there is
serious doubt as to collectibility,  the accrual of interest income is generally
discontinued  unless  the  estimated  net  realizable  value  of  collateral  is
sufficient to assure  collection of the principal  balance and accrued interest.
When the  collectibility  of a  significant  amount of  principal  is in serious
doubt,  the  principal  balance  is  reduced  to the  estimated  fair  value  of
collateral by  charge-off  to the  allowance for loan losses and any  subsequent
collections  are credited first to the remaining  principal  balance and then to
the  allowance  for loan  losses as a  recovery  of the  amount  charged  off. A
nonaccrual loan is not returned to accrual status unless  principal and interest
are current and the borrower  has  demonstrated  the ability to continue  making
payments  as agreed.  At  December  31,  2001,  the Bank had two loans  totaling
$396,000 on non-accrual  status. Net income for 2001 includes $8,085 of interest
income on these  loans.  Had these loans been current in  accordance  with their
original terms $30,013 of additional interest income would have been recorded in
2001.  There were no loans 90 days or more past due which  were  still  accruing
interest or troubled debt restructurings at December 31, 2001.

Potential Problem Loans

         Management  has  identified  and maintains a list of potential  problem
loans. These are loans that are not included in nonaccrual status, or loans that
are  past  due 90  days or more  and  still  accruing.  A loan is  added  to the
potential  problem  list when  management  becomes  aware of  information  about
possible  credit  problems of  borrowers  that causes  serious  doubts as to the
ability of such  borrowers to comply with the current loan repayment  terms.  On
December 31, 2001 the total amount of loans  determined  by  management  to be a
potential  problem  was  $81,079.  This  amount  consisted  of loans made to two
borrowers.

Real Estate Owned

         The  Bank was not  carrying  any  amount  in other  real  estate  owned
pursuant to foreclosure or  in-substance  foreclosure at December 31, 2001. Real
estate owned is initially recorded at the lower of net loan principal balance or
its estimated fair market value less estimated selling costs. The estimated fair
value is determined by appraisal at the time of acquisition. The $200,000 amount
carried  at  December  31,  2000,  was sold  during  2001  with a loss of $4,015
recorded at the time this asset was sold.

Allowance for Loan Losses

         The  allowance  for loan  losses  is  increased  by direct  charges  to
operating  expense.  Losses on loans are charged  against the  allowance  in the
period in which  management has determined  that it is more likely than not such
loans have become uncollectible.  Recoveries of previously charged off loans are
credited  to the  allowance.  The  table,  "Summary  of Loan  Loss  Experience,"
summarizes loan balances at the end of each period indicated,  averages for each
period, changes in the allowance arising from charge-offs and recoveries by loan
category, and additions to the allowance which have been charged to expense.

         In reviewing the adequacy of the allowance for loan losses at each year
end,  management took into  consideration the historical loan losses experienced
by the Bank,  current economic  conditions  affecting the borrowers'  ability to
repay,  the volume of loans,  and the  trends in  delinquent,  nonaccruing,  and
potential  problem loans, and the quality of collateral  securing  nonperforming
and problem loans. After charging off all known losses, management considers the
allowance for loan losses adequate to cover its estimate of possible future loan
losses inherent in the loan portfolio as of December 31, 2001.



                                       13
<Page>

         In  calculating  the amount  required in the allowance for loan losses,
management  applies a  consistent  methodology  that is updated  quarterly.  The
methodology  utilizes a loan risk grading  system and  detailed  loan reviews to
assess credit risks and the overall  quality of the loan  portfolio,  as well as
other  off-balance-sheet  credit  risks  such as loan  commitments  and  standby
letters of credit. Also, the calculation provides for management's assessment of
trends in national and local economic  conditions  that might affect the general
quality of the loan portfolio.  Regulators  review the adequacy of the allowance
for loan  losses  as part of  their  examination  of the  Bank  and may  require
adjustments  to the allowance  based upon  information  available to them at the
time of the examination.

                         Summary of Loan Loss Experience

<Table>
<Caption>
                                                                                                       Year Ended
                                                                                                       ----------
                                                                                      December 31, 2001            December 31, 2000
                                                                                      -----------------            -----------------
                                                                                               (Dollars in thousands)

<S>                                                                                        <C>                          <C>
Total loans outstanding at end of period .............................................     $102,333                     $ 82,838
Average amount of loans outstanding ..................................................      126,166                       70,980

Balance of allowance for loan losses - beginning .....................................     $  1,055                     $    800
                                                                                           --------                     --------
Loans charged off
     Commercial & Industrial .........................................................           48                            0
     Consumer installment ............................................................            2                            0
                                                                                           --------                     --------
        Total charge-offs ............................................................           50                            0
Recoveries of loans previously charged-off
     Consumer installment ............................................................            1                            0
Net charge-offs ......................................................................           51                            0
                                                                                           --------                     --------

Additions to allowance charged to expense ............................................          446                          225
                                                                                           --------                     --------

Balance of allowance for loan losses - ending ........................................     $  1,450                     $  1,055
                                                                                           ========                     ========

Ratios
     Net charge-offs during period to average
        loans outstanding during period ..............................................         0.05%                        0.00%
     Net charge-offs to loans at end of period .......................................         0.04%                        0.00%
     Allowance for loan losses to average loans ......................................         1.21%                        1.49%
     Allowance for loan losses to loans at end of period .............................         1.15%                        1.27%
     Allowance for loan losses to nonperforming loans
        at end of period .............................................................         3.66%                        3.66%
     Net charge-offs to allowance for loan losses ....................................         3.52%                        0.00%
     Net charge-offs to provision for loan losses ....................................        11.43%                        0.00%
</Table>


     The  following  table  presents the  allocation  of the  allowance for loan
losses at the end of the years ended  December 31, 2001 and 2000,  compared with
the percent of loans in the applicable categories to total loans.

                     Allocation of Allowance for Loan Losses

<Table>
<Caption>
                                                                                 Period Ended December 31,
                                                                                 -------------------------
                                                                         2001                                     2000
                                                                         ----                                     ----
                                                                  Amount            % of Loans         Amount            % of Loans
                                                                  ------            ----------         ------            ----------
                                                                                           (Dollars in thousands)
<S>                                                               <C>                  <C>                <C>                  <C>
Commercial and industrial ..........................              $  703               48.5%              $  506               48.0%
Real Estate - construction .........................                 174               12.0%                 127               12.0%
Real Estate - mortgage .............................                 551               38.0%                 406               38.5%
Consumer installment ...............................                  22                1.5%                  16                1.5%
                                                                  ------              -----               ------              -----
     Total .........................................              $1,450                100%              $1,055                100%
                                                                  ======              =====               ======              =====
</Table>



                                       14
<Page>


Deposits

         The average  amounts and average rate paid of deposits held by the Bank
for the years ended December 31, 2001 and 2000 are summarized below:

<Table>
<Caption>
                                                                                             Average Deposits

                                                                           December 31, 2001                  December 31, 2000
                                                                           -----------------                  -----------------
                                                                          Amount            Rate            Amount             Rate
                                                                          ------            ----            ------             ----
                                                                                           (Dollars in thousands)

<S>                                                                        <C>             <C>               <C>             <C>
Noninterest bearing demand ...................................             7,864                              4,415
Interest bearing transaction accounts ........................            23,683           3.62 %            19,927           5.31 %
Savings & MMIA ...............................................             2,750           2.40 %             2,072           4.10 %
Time deposits - $100,000 and over ............................            14,721           5.92 %            15,780           6.44 %
Other time deposits ..........................................            51,314           5.51 %            39,477           6.47 %
                                                                         -------           ------           -------           ------

         Total deposits ......................................           100,332           4.60 %            81,671           5.77 %
                                                                         =======           ======           =======           ======
</Table>

         As of December 31, 2001, the Bank held  $14,947,000 in time deposits of
$100,000 or more, with  approximately  $10,759,000 with maturities  within three
months,  $2,298,000 with  maturities  over three through six months,  $1,331,000
with  maturities  over six through twelve months,  and $559,000 with  maturities
over twelve months.  Wholesale  time deposits  (certificates  generated  through
corporations,   banks,  credit  unions,  etc.,  on  a  national  level)  totaled
$9,660,000  as of December 31,  2001.  It is a common  industry  practice not to
consider these types of deposits as core deposits because their retention can be
expected to be heavily influenced by rates offered,  and therefore they have the
characteristics of shorter-term purchased funds. Wholesale time deposits involve
the  maintenance  of an  appropriate  matching  of maturity  distribution  and a
diversification  of sources to achieve an appropriate  level of liquidity.  Such
deposits are  generally  more volatile and interest  rate  sensitive  than other
deposits.

Return on Equity Assets

         The following  table shows the return on assets (net income  divided by
average total assets),  return on equity (net income divided by average equity),
dividend  payout ratio  (dividends  declared per share divided by net income per
share),  and equity to asset  ratio  (average  equity  divided by average  total
assets) for each period indicated.

                                                  Years Ended December 31,
                                                    2001            2000
                                                    ----            ----

                Return on assets ...............    0.71%           0.81%
                Return on equity ...............    7.25%           6.91%
                Dividend payout ratio ..........    0.00%           0.00%
                Equity to asset ratio ..........    9.80%          11.76%
Liquidity

         Liquidity is the ability to meet current and future obligations through
liquidation  or maturity of existing  assets or the  acquisition  of  additional
liabilities.  Adequate  liquidity  is  necessary  to meet  the  requirements  of
customers for loans and deposit  withdrawals  in the most timely and  economical
manner. Some liquidity is ensured by maintaining assets which may be immediately
converted  into cash at minimal cost  (amounts due from banks and federal  funds
sold).  However,  the most  manageable  sources of  liquidity  are  composed  of
liabilities, with the primary focus on liquidity management being on the ability
to obtain deposits within the Bank's service area. Core deposits (total deposits
less wholesale time deposits) provide a relatively stable funding base, and were
equal to 63.3% of total assets at December 31, 2001. Asset liquidity is provided
from several sources,  including  amounts due from banks and federal funds sold,
and funds from maturing loans.  The Bank is a member of the FHLB of Atlanta and,
as such,  has the  ability  to borrow  against  the  security  of its 1-4 family
residential  mortgage loans.  The Bank also has $5.5 million  available  through
lines of credit with other banks as an additional  source of liquidity  funding.
Management  believes that the Bank's overall  liquidity  sources are adequate to
meet its operating needs in the ordinary course of its business.

Capital Resources

         The equity  capital of the Bank  increased by $980,612  during 2000 and
increased  $1,019,009  during  2001 as the  result of net  income and a $113,174
change in comprehensive income.



                                       15
<Page>

         The Bank is subject to regulatory  capital  adequacy  standards.  Under
these standards, financial institutions are required to maintain certain minimum
ratios of capital to  risk-weighted  assets and average total assets.  Under the
provisions of the Federal  Deposit  Insurance  Corporation  Improvements  Act of
1991,  federal  financial  institution  regulatory  authorities  are required to
implement  prescribed "prompt corrective  actions" upon the deterioration of the
capital position of a bank. If the capital  position of an affected  institution
were to fall below certain levels,  increasingly stringent regulatory corrective
actions are mandated.

         The Bank's  December  31,  2001  capital  ratios are  presented  in the
following table,  compared with the "well  capitalized" and minimum ratios under
the FDIC regulatory definitions and guidelines:

<Table>
<Caption>
                                                                                                                   To be well
                                                                                                                   capitalized
                                                                                                                  under prompt
                                                                                         For capital               corrective
                                                                                      adequacy purposes        action provisions
                                                                                      -----------------        -----------------
                                                               Actual                      Minimum                  Minimum
                                                               ------                      -------                  -------
                                                     Amount         Ratio          Amount          Ratio       Amount         Ratio
                                                     ------         -----          ------          -----       ------         -----
                                                                                  (Dollars in thousands)
As of December 31, 2001
<S>                                                 <C>               <C>         <C>               <C>        <C>             <C>
   Total Capital (to risk
      weighted assets) ....................         $14,249           11.4%       $10,003           8.0%       $12,504         10.0%
   Tier 1 Capital (to risk
      weighted assets) ....................          12,799           10.2%         5,001           4.0          7,502          6.0
   Tier 1 Capital (to average
      assets)(leverage) ...................          12,799            9.1%         5,650           4.0          7,062          5.0
</Table>

Inflation

         Since the assets and  liabilities  of a bank are primarily  monetary in
nature (payable in fixed,  determinable  amounts),  the performance of a bank is
affected  more by changes in interest  rates than by inflation.  Interest  rates
generally increase as the rate of inflation increases,  but the magnitude of the
change in rates may not be the same.

         While the effect of inflation  on banks is normally not as  significant
as is its influence on those  businesses  which have large  investments in plant
and inventories, it does have an effect. During periods of high inflation, there
are  normally  corresponding  increases  in the money  supply,  and  banks  will
normally experience  above-average  growth in assets,  loans and deposits.  Also
general  increases  in the  prices  of goods  and  services  usually  result  in
increased operating expenses.




                                       16
<Page>


Item 7.  Financial Statements.


                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
                        Consolidated Financial Statements
                           December 31, 2001 and 2000




                                    Contents

                                                                          Page

Independent Auditors' Report ..........................................    18
Consolidated Balance Sheets ...........................................    19
Consolidated Statements of Operations .................................    20
Consolidated Statements of Changes in Stockholders' Equity ............    21
Consolidated Statements of Cash Flows .................................    22
Notes to Financial Statements ......................................... 23-40



                                       17
<Page>


















                          Independent Auditors' Report



The Board of Directors and Stockholders
First South Bancorp, Inc. and Subsidiary


We have  audited the  accompanying  consolidated  balance  sheets of First South
Bancorp,  Inc. and Subsidiary (the Company) as of December 31, 2001 and 2000 and
the related  consolidated  statements of  operations,  changes in  stockholders'
equity  and cash  flows  for each of the years in the three  year  period  ended
December  31,   2001.   These   consolidated   financial   statements   are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the financial position of First South Bancorp,
Inc.  and  Subsidiary  at  December  31,  2001 and 2000 and the results of their
operations  and their cash flows for each of the years in the three year  period
ended  December 31, 2001 in  conformity  with  accounting  principles  generally
accepted in the United States of America.



                                               Cherry, Bekaert & Holland, LLP



Spartanburg, South Carolina
January 11, 2002




                                       18
<Page>

                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
                           Consolidated Balance Sheets
                           December 31, 2001 and 2000


<Table>
<Caption>
                                                                                                            2001            2000
                                                                                                            ----            ----
     Assets

<S>                                                                                                  <C>              <C>
Cash and due from banks ..........................................................................   $   3,039,047    $   2,043,654
Interest-bearing deposits ........................................................................       3,400,000        8,853,682
Securities available for sale (cost basis of  $8,722,686 and $12,286,414, respectively) (Note 3) .       8,900,678       12,281,596
Securities held for investment (market value of $1,441,576 and $4,432,542, respectively) (Note 3)        1,349,936        4,349,020
Loans (Note 4) ...................................................................................     126,166,046       82,838,428
Less: allowance for loan losses (Note 4) .........................................................      (1,450,000)      (1,055,000)
     net deferred loan fees ......................................................................        (103,325)         (40,975)
                                                                                                     -------------    -------------
     Net loans ...................................................................................     124,612,721       81,742,453

Premises and equipment, net (Note 5) .............................................................       2,876,229        2,905,738
Other assets .....................................................................................       2,328,241        2,504,307
                                                                                                     -------------    -------------

     Total Assets ................................................................................   $ 146,506,852    $ 114,680,450
                                                                                                     =============    =============

     Liabilities and Stockholders' Equity

Deposits (Note 6)
     Noninterest-bearing demand ..................................................................   $   9,730,668    $   6,355,462
     Interest-bearing demand and savings .........................................................      28,577,686       28,272,956
     Time deposits ...............................................................................      78,974,722       63,957,092
                                                                                                     -------------    -------------
          Total deposits .........................................................................     117,283,076       98,585,510

Retail repurchase agreements .....................................................................       5,209,370        2,553,119
Other borrowed funds (Note 7) ....................................................................      10,000,000                -
Other accrued expenses and liabilities ...........................................................       1,105,453        1,651,877
                                                                                                     -------------    -------------

     Total liabilities ...........................................................................     133,597,899      102,790,506
                                                                                                     -------------    -------------

Stockholders' equity (Notes 8,11 and 13)
     Common stock no par value; authorized 20,000,000
          shares; 917,780 issued and outstanding at December 31, 2001 and 2000 ...................               -                -
     Paid-in capital .............................................................................      11,096,989       11,096,989
     Retained earnings ...........................................................................       1,701,776          795,941
     Accumulated other comprehensive (loss) ......................................................         110,188           (2,986)
                                                                                                     -------------    -------------

 Stockholders' equity ............................................................................      12,908,953       11,889,944
Commitments (Notes 4 and 10) .....................................................................               -                -
                                                                                                     -------------    -------------
                                                                                                     $ 146,506,852    $ 114,680,450
                                                                                                     =============    =============
</Table>




     See accompanying notes to consolidated financial statements.

                                       19

<Page>

              FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
                Consolidated Statements of Operations
            Years ended December 31, 2001, 2000 and 1999



<Table>
<Caption>
                                                                                    2001                  2000              1999
                                                                                    ----                  ----               ----

Interest income
<S>                                                                               <C>                <C>                <C>
     Loans ................................................................       $ 8,596,068        $ 7,521,179        $ 4,172,306
     Federal funds sold
                                                                                        1,363             14,672            195,316
     Securities
        U.S. Government and agency obligations ............................           787,742            667,137            581,440
        State and local obligations .......................................            25,979             25,977             25,975
        Equity and other securities .......................................            80,154             16,238             11,392
     Deposits with banks ..................................................           177,014            491,350             18,913
                                                                                  -----------        -----------        -----------
        Total interest income .............................................         9,668,320          8,736,553          5,005,342
                                                                                  -----------        -----------        -----------

Interest expense
     Deposits
        Time ..............................................................         3,697,867          3,570,182          1,694,408
        Interest-bearing demand and savings ...............................           922,915          1,144,521            709,482
     Borrowed funds .......................................................           384,005             17,353             16,751
     Other ................................................................           130,219            104,590             71,782
                                                                                  -----------        -----------        -----------
         Total interest expense ...........................................         5,135,006          4,836,646          2,492,423

         Net interest income ..............................................         4,533,314          3,899,907          2,512,919

Provision for loan losses (Note 4) ........................................           445,853            254,855            225,270
                                                                                  -----------        -----------        -----------

         Net interest income after provision for loan losses ..............         4,087,461          3,645,052          2,287,649

Non-interest income
     Service charges, fees, and commissions ...............................           374,687            187,880            174,909
     Other ................................................................            56,559             96,017             64,717
                                                                                  -----------        -----------        -----------
         Total other operating income .....................................           431,246            283,897            239,626

Non-interest expenses
     Salaries and employee benefits .......................................         1,921,795          1,629,895          1,119,603
     Occupancy and equipment ..............................................           480,377            464,556            350,617
     Other ................................................................           796,125            688,304            550,864
                                                                                  -----------        -----------        -----------
         Total other operating expenses ...................................         3,198,297          2,782,755          2,021,084

         Income before income taxes .......................................         1,320,410          1,146,194            506,191

Current income tax expense (Note 9) .......................................           612,575            460,464            203,479
Deferred income tax benefit ...............................................          (198,000)           (96,000)          (202,300)
                                                                                  -----------        -----------        -----------

        Net Income ........................................................       $   905,835        $   781,730        $   505,012
                                                                                  ===========        ===========        ===========

Earnings per common share (Notes 2, 15) ...................................       $      0.99        $      0.85        $      0.55
Diluted earnings per common share (Notes 2, 15) ...........................       $      0.97        $      0.84        $      0.54
</Table>




See accompanying notes to consolidated financial statements.


                                       20
<Page>

                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
           Consolidated Statements of Changes in Stockholders' Equity
                  Years ended December 31, 2001, 2000 and 1999




<Table>
<Caption>
                                                           Common                                       Accumulated
                                                          Stock in                                         Other          Total
                                                          Number of     Paid-In        Retained        Comprehensive   Stockholders'
                                                           Shares       Capital        Earnings        Income (Loss)      Equity
                                                           ------       -------        --------        -------------      ------

<S>                                                    <C>             <C>             <C>              <C>              <C>
Balance at December 31, 1998 .....................         915,759     $11,066,532     $  (490,801)     $   (10,896)     $10,564,835

     Exercised stock options .....................             102           1,184               -                -            1,184
     Stock in lieu of director fee ...............           1,319          22,423               -                -           22,423

     Comprehensive income:
         Net income ..............................               -               -         505,012                -
         Net change in unrealized gain
         on securities available for sale,
         net of tax of ($119,528 ) ...............               -               -               -         (184,122)
       Comprehensive income ......................               -               -               -                -          320,890
                                                       -----------     -----------     -----------      -----------      -----------

Balance at December 31, 1999 .....................         917,180      11,090,139          14,211         (195,018)      10,909,332

     Exercised stock options .....................             600           6,850               -                -            6,850

     Comprehensive income:
         Net income ..............................               -               -         781,730                -
         Net change in unrealized gain
         on securities available for sale,
         net of tax of ($122,775 ) ...............               -               -               -          192,032
       Comprehensive income ......................               -               -               -                -          973,762
                                                       -----------     -----------     -----------      -----------      -----------

Balance at December 31, 2000 .....................         917,780      11,096,989         795,941           (2,986)      11,889,944

     Comprehensive income:
         Net income ..............................               -               -         905,835                -
         Net change in unrealized gain
         on securities available for sale,
         net of tax of ($72,357) .................               -               -               -          113,174
       Comprehensive income ......................               -               -               -                -        1,019,009
                                                       -----------     -----------     -----------      -----------      -----------

Balance at December 31, 2001 .....................         917,780     $11,096,989     $ 1,701,776      $   110,188      $12,908,953
                                                       ===========     ===========     ===========      ===========      ===========
</Table>

See accompanying notes to consolidated financial statements.

                                       21
<Page>

            FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
              Consolidated Statements of Cash Flows
          Years ended December 31, 2001, 2000 and 1999



<Table>
<Caption>
                                                                                    2001                2000               1999
                                                                                    ----                ----               ----
Cash flows from operating activities
<S>                                                                              <C>                <C>                <C>
      Net income ..........................................................      $    905,835       $    781,730       $    505,012
      Adjustments to reconcile net income to net cash
            provided by operating activities
                Depreciation ..............................................           203,548            201,978            172,027
                Provision for loan losses .................................           445,853            254,855            225,270
                Loss on sale of other real estate owned ...................                 -                  -             36,603
                Deferred tax asset ........................................          (198,000)           (96,000)          (202,300)
                Director fees .............................................                 -                  -             22,423
                Amortization, net .........................................                 -             48,078            112,810
                Decrease (increase) in interest receivable ................           172,270           (409,132)           (99,981)
                Decrease (increase) in other assets .......................           170,380           (263,349)          (219,687)
                Increase (decrease) in accrued expenses
                   and other liabilities ..................................          (546,424)           438,688            579,381
                                                                                 ------------       ------------       ------------

                Net cash provided by operating activities .................         1,153,462            956,848          1,131,558
                                                                                 ------------       ------------       ------------


Cash flows from investing activities
      Origination of loans, net of principal collected ....................       (43,316,121)       (26,606,143)       (21,169,141)
      Proceeds from matured/called securities available for sale ..........        12,000,896                  -                  -
      Proceeds from matured/called securities held for investment .........         2,999,084                  -                  -
      Purchase of securities available for sale ...........................        (8,437,438)        (2,000,000)        (1,000,000)
      Purchase of securities held for investment ..........................                 -         (3,974,020)                 -
      Proceeds from sale of other real estate owned .......................                 -            753,100            379,865
      Purchases of premises and equipment .................................          (174,038)          (244,285)          (141,342)
      Increase in cash surrender value of life insurance ..................           (37,951)           (34,972)          (846,204)
      Purchases of restricted FHLB stock ..................................                 -                  -            (58,500)
      Proceeds from call of available for sale securities .................                 -                  -          1,000,000
      Purchase of other real estate owned .................................                 -                  -           (343,086)
                                                                                 ------------       ------------       ------------

                 Net cash used in investing activities ....................       (36,965,568)       (32,106,320)       (22,178,408)
                                                                                 ------------       ------------       ------------

Cash flows from financing activities
      Net increase in deposits ............................................        18,697,566         39,870,192         16,768,218
      Proceeds from exercise of stock options .............................                 -              6,850              1,184
      Net increase in retail repurchase agreements ........................         2,656,251            829,955            396,919
      Proceeds of advances from FHLB ......................................        12,500,000                  -                  -
      Repayment of advances from FHLB .....................................        (2,500,000)        (2,500,000)                 -
      Proceeds from other borrowings ......................................                 -                  -          2,500,000
      Proceeds from stock sale ............................................                 -                  -                  -

                                                                                 ------------       ------------       ------------
                 Net cash provided by financing activities ................        31,353,817         38,206,997         19,666,321
                                                                                 ------------       ------------       ------------

Net increase (decrease) in cash and cash equivalents ......................        (4,458,289)         7,057,525         (1,380,529)

Cash and cash equivalents at beginning of year ............................        10,897,336          3,839,811          5,220,340
                                                                                 ------------       ------------       ------------

Cash and cash equivalents at end of year ..................................      $  6,439,047       $ 10,897,336       $  3,839,811
                                                                                 ============       ============       ============

Supplemental disclosure of cash flow information
      Cash paid during the year for interest ..............................      $  5,472,592       $  4,316,086       $  1,797,793
                                                                                 ============       ============       ============
      Cash paid (received) during the year for income taxes ...............      $    811,581       $    462,271       $     (7,138)
                                                                                 ============       ============       ============
</Table>

See accompanying notes to consolidated financial statements.

                                       22
<Page>

                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
                 Notes to the Consolidated Financial Statements
                           December 31, 2001 and 2000


Note 1 - Organization

First South  Bancorp,  Inc.  (the  "Corporation"  or the  "Company")  is a South
Carolina  corporation  organized  in 1999 for the  purpose  of  being a  holding
company for First South Bank (the "Bank").  On September 30, 1999, pursuant to a
plan  of  exchange  approved  by  the  shareholders  of  the  Bank,  all  of the
outstanding  shares of common  stock of the Bank were  exchanged  for  shares of
common  stock  of the  Corporation.  The  Corporation  presently  engages  in no
business  other than that of owning the Bank and has no employees.  The Bank was
incorporated on April 23, 1996, and began banking operations on August 19, 1996.
The Bank is a South Carolina chartered commercial bank and is engaged in lending
and deposit gathering activities from two branches in Spartanburg County and one
branch in Columbia, South Carolina. It operates under the laws of South Carolina
and the Rules and Regulations of the Federal Deposit  Insurance  Corporation and
the South Carolina State Board of Financial Institutions.


Note 2 - Summary of significant accounting policies

The  following is a  description  of the  significant  accounting  and reporting
policies that First South Bancorp,  Inc. and Subsidiary (the "Company")  follows
in preparing and presenting their financial statements.

     (a)  Basis of Presentation and Consolidation

          The  consolidated  financial  statements  include the  accounts of the
          Corporation and its wholly-owned subsidiary, the Bank. All significant
          intercompany   balances  and  transactions  have  been  eliminated  in
          consolidation.

     (b)  Use of Estimates

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

     (c)  Securities

          Investments in equity  securities that have readily  determinable fair
          values  and all  investments  in debt  securities  are  classified  at
          acquisition into one of three categories and accounted for as follows:



                                       23
<Page>


                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
            Notes to the Consolidated Financial Statements, Continued
                           December 31, 2001 and 2000


Note 2 - Summary of significant accounting policies, continued

     o    securities  held for investment are  held-to-maturity  and reported at
          amortized cost,

     o    trading  securities are reported at fair value with  unrealized  gains
          and losses included in earnings, or;

     o    securities  available-for-sale  are reported at  estimated  fair value
          with unrealized  gains and losses reported as a separate  component of
          comprehensive income (net of tax effect).

      The  Company  intends  to hold the  available-for-sale  securities  for an
      indefinite  period of time but may sell them prior to maturity.  All other
      securities have been  classified as  held-to-maturity  securities  because
      management has determined  that the Company has the intent and the ability
      to hold all such securities until maturity.

      Gains and losses on sales of securities are recognized  when realized on a
      specific  identification  basis. Premiums and discounts are amortized into
      interest income using a method that approximates the level yield method.

      The  Company  had no  investments  classified  as  trading  securities  at
      December 31, 2001 and 2000.

   (d)Loans and allowance for loan losses

     Loans are carried at their principal amount outstanding. Interest income is
     recorded  as earned  on an  accrual  basis.  The  accrual  of  interest  is
     discontinued when, in management's  opinion,  the borrower may be unable to
     meet  payments  as they  become  due,  generally  when  the loan is 90 days
     delinquent.  All  interest  accrued  but not  collected  for loans that are
     placed on nonaccrual is reversed against interest income.

     The Company  uses the  allowance  method in  providing  for  possible  loan
     losses.  The provision for loan losses is based upon management's  estimate
     of the  amount  needed to  maintain  the  allowance  for loan  losses at an
     adequate level to cover known and inherent losses in the loan portfolio. In
     determining the provision amount, management gives consideration to current
     and anticipated economic conditions, the growth and composition of the loan
     portfolio, the relationship of the allowance for loan losses to outstanding
     loans and other  factors.  Management  believes that the allowance for loan
     losses is adequate. While management uses the best information available to
     make evaluations, future adjustments may be necessary if economic and other
     conditions differ substantially from the assumptions used.



                                       24
<Page>


                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
            Notes to the Consolidated Financial Statements, Continued
                           December 31, 2001 and 2000


Note 2 - Summary of significant accounting policies, continued

      Management   considers  loans  to  be  impaired  when,  based  on  current
      information and events,  it is probable that the Company will be unable to
      collect all amounts due  according  to the  contractual  terms of the loan
      agreement.  Factors that influence management's judgments include, but are
      not limited to, loan payment  pattern,  source of repayment,  and value of
      collateral.  A loan would not be considered  impaired if an  insignificant
      delay in loan payment occurs and management expects to collect all amounts
      due. The major  sources for  identification  of loans to be evaluated  for
      impairment include past due and nonaccrual reports,  internally  generated
      lists of loans  with  certain  risk  grades,  and  regulatory  reports  of
      examination.  Impaired  loans are  measured  using  either the  discounted
      expected  cash flow  method or the value of  collateral  method.  When the
      ultimate  collectibility  of an  impaired  loan's  principal  is in doubt,
      wholly or partially, all cash receipts are applied to principal.

   (e)Other real estate owned

      Other real estate  owned (OREO)  represents  properties  acquired  through
      foreclosure or other proceedings. OREO is held for sale and is recorded at
      the  lower  of the  recorded  amount  of the  loan  or fair  value  of the
      properties less estimated costs of disposal.  Any write-down to fair value
      at the time of  transfer  to OREO is  charged  to the  allowance  for loan
      losses.  Property is evaluated  regularly to ensure the carrying amount is
      supported by its current fair value. OREO is reported net of allowance for
      losses in the Company's financial statements.

   (f)Premises and equipment

      Premises and equipment,  including leasehold  improvements,  are stated at
      cost less  accumulated  depreciation.  Depreciation  is provided  over the
      estimated    useful    lives   of   the    respective    assets   on   the
      straight-line-basis.  Leasehold  improvements  are  amortized  over a term
      which  includes the  remaining  lease term and probable  renewal  periods.
      Expenditures  for major renewals and betterments are capitalized and those
      for maintenance and repairs are charged to operating expense as incurred.

   (g) Income taxes

      Deferred  tax assets and  liabilities  are  recognized  for the future tax
      consequences  attributable to differences  between the financial statement
      carrying amount of existing  assets and  liabilities and their  respective
      tax bases.  Deferred tax assets and liabilities are measured using enacted
      tax rates  expected to apply to taxable income in the years in which those
      temporary differences are expected to be recovered in income. Deferred tax
      assets are reduced by a valuation  allowance if it is more likely than not
      that the tax benefits will not be realized.






                                       25
<Page>


                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
            Notes to the Consolidated Financial Statements, Continued
                           December 31, 2001 and 2000


Note 2 - Summary of significant accounting policies, continued

   (h)Cash and cash equivalents

           Cash and cash  equivalents  include cash and due from banks,  federal
funds sold and interest-bearing  deposits. During the normal course of business,
the Company may have cash  deposits  with banks that are in excess of  federally
insured limits.

   (i) Earnings per common share

           Earnings per common share is computed  based on the weighted  average
number of common shares outstanding.  Diluted earnings per common share includes
the dilutive effect of outstanding stock options.

   (j)Fair value of financial instruments

      Financial   Accounting   Standards  Board  ("FASB")   Statement  No.  107,
      Disclosures about Fair Value of Financial Instruments, requires disclosure
      of fair value  information  about  financial  instruments,  whether or not
      recognized on the face of the balance  sheet,  for which it is practicable
      to estimate that value. The assumptions used in the estimation of the fair
      value of the Company's  financial  instruments are detailed  below.  Where
      quoted prices are not available,  fair values are based on estimates using
      discounted  cash  flows  and  other  valuation  techniques.   The  use  of
      discounted  cash flows can be  significantly  affected by the  assumptions
      used,  including the discount rate and estimates of future cash flows. The
      following  disclosures  should  not be  considered  an  indication  of the
      liquidation  value of the  Company,  but  rather  represent  a  good-faith
      estimate of the value of the financial instruments held by the Company.

      The following methods and assumptions were used to estimate the fair value
      for each class of financial instruments.

      Cash and cash  equivalents.  For cash on  hand,  amounts  due from  banks,
      federal funds sold,  and  interest-bearing  deposits,  the carrying  value
      approximates fair value.

      Securities.  The fair value of  investment  securities  is based on quoted
      market  prices,  if available.  If a quoted market price is not available,
      fair value is estimated using quoted market prices for similar securities.
      Restricted FHLB stock is valued at cost.

      Loans.  The fair value of fixed rate loans is estimated by discounting the
      future cash flows using the current  rates at which similar loans would be
      made to borrowers  with similar  credit ratings and for the same remaining
      maturities.  The fair value of variable rate loans with frequent repricing
      and no significant changes in credit risk approximates book value.




                                       26
<Page>

                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
            Notes to the Consolidated Financial Statements, Continued
                           December 31, 2001 and 2000


Note 2 - Summary of significant accounting policies, continued

      Deposits and  borrowings.  The fair value of fixed rate time  deposits and
      borrowed funds is estimated by discounting the future cash flows using the
      current rates at which similar  deposits and borrowings  would be accepted
      for the same remaining maturities.

      Other   interest-bearing   liabilities.   The  carrying  value  of  retail
      repurchase  agreements and other borrowed  funds  approximates  fair value
      since  these   obligations   have  variable   interest  rates  with  daily
      repricings.

      Commitments.  The fair value of commitments to extend credit is considered
      to   approximate   carrying  value  since  the  large  majority  of  these
      commitments  would  result  in  loans  that  have  variable  rates  and/or
      relatively short terms to maturity. For other commitments,  generally of a
      short-term  nature,  the carrying  value is  considered to be a reasonable
      estimate of fair value.

   (k)Recent accounting pronouncements

     FASB Statement No. 144, Accounting for Transfers and Servicing of Financial
     Assets and  Extinguishments  of Liabilities,  was issued in August 2001 and
     supersedes  Statement  No.  121.  Statement  No.  144  addresses  financial
     accounting  and  reporting  for the  impairment  or disposal of  long-lived
     assets.  The  provisions  of Statement  No. 144 are effective for financial
     statements  issued for fiscal years  beginning after December 15, 2001. The
     Company  expects that adopting the  provisions of this  Statement  will not
     have a material  impact on the  consolidated  financial  statements  of the
     Company.

(l)  Operating Segments

     The FASB  issued  Statement  No.  131,  Disclosures  about  Segments  of an
     Enterprise  and  Related  Information,  in  June  1997,  which  establishes
     standards for the way public business  enterprises report information about
     operating segments.  This statement also establishes  standards for related
     disclosures about products, services, geographic areas and major customers.
     In adopting  Statement No. 131, the Company has determined  that, using the
     definitions  contained in the statement,  all of its activities  constitute
     only one reportable operating segment.


(m)  Financial statement reclassification

     Certain  of the prior year  amounts  have been  reclassified  to conform to
     current year  presentation;  such  reclassifications  are immaterial to the
     financial statements.







                                       27
<Page>



                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
            Notes to the Consolidated Financial Statements, Continued
                           December 31, 2001 and 2000


Note 3 - Securities

Available for sale

A summary of the amortized cost and estimated fair value of securities available
for sale follows:



<Table>
<Caption>
                                                                                   Gross               Gross              Estimated
                                                             Amortized          Unrealized          Unrealized              Fair
                                                               Cost                Gains              Losses                Value
                                                               ----                -----              ------                -----

December 31, 2001
<S>                                                       <C>                  <C>                 <C>                   <C>
   U.S. Government agency obligations ..........          $ 8,000,000          $   181,249         $          -          $ 8,181,249
   State and local obligations .................              122,956                    -                3,257              119,429
   Restricted FHLB stock .......................              600,000                    -                    -              600,000
       Total securities
           available for sale ..................          $ 8,722,956          $   181,249          $     3,257          $ 8,900,679

December 31, 2000
   U.S. Government agency obligations ..........          $12,000,000          $         -          $     3,748          $11,996,252
   State and local obligations .................              122,914                    -                1,070              121,844
   Restricted FHLB stock .......................              163,500                    -                    -              163,500
       Total securities
           available for sale ..................          $12,286,414          $         -          $     4,818          $12,281,596
</Table>


There were no sales of securities available for sale during 2001, 2000 and 1999.



                                       28
<Page>


                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
            Notes to the Consolidated Financial Statements, Continued
                           December 31, 2001 and 2000


Note 3 - Securities, continued

Held for investment

A summary of the carrying  value and  estimated  fair market value of securities
held for investment follows:

<Table>
<Caption>
                                                                                      Gross             Gross              Estimated
                                                                  Amortized         Unrealized        Unrealized             Fair
                                                                    Cost              Gains             Losses               Value
                                                                    ----              -----             ------               -----
December 31, 2001
<S>                                                            <C>                <C>                <C>                  <C>
   U.S. Government agency obligations ................         $  500,000         $   29,063         $          -         $  529,063
   Trust Preferred securities ........................            474,936             61,957                    -            536,893
   State and local obligations .......................            375,000              1,020                    -            376,020
       Total securities held for
            investment ...............................         $1,349,936         $   92,040         $          -         $1,441,976

December 31, 2000
   U.S. Government agency obligations ................         $3,500,000         $   36,564         $          -         $3,536,564
   Trust Preferred securities ........................            474,020             44,231                    -            518,251
   State and local obligations .......................            375,000              2,727                    -            377,727
       Total securities held for investment ..........         $4,349,020         $   83,522         $          -         $4,432,542
</Table>

There were no sales of securities held for investment in 2001, 2000 and 1999.

The scheduled  maturities of securities  held for  investment  and available for
sale at December 31, 2001 were as follows:


<Table>
<Caption>
                                                                   Available for Sale                  Held for Investment
                                                                   ------------------                  -------------------
                                                                                Estimated                                Estimated
                                                           Amortized              Fair               Amortized             Fair
                                                              Cost                Value                Cost                Value
                                                              ----                -----                ----                -----

<S>                                                        <C>                  <C>              <C>                  <C>
Due in one year or less ........................           $3,000,000           $3,013,125       $            -       $            -
Due from one to five years .....................            4,000,000            4,137,500              500,000              529,063
Due from five to 10 years ......................            1,000,000            1,030,625                    -                    -
Due after ten years ............................              122,956              119,428              849,936              912,913
Equity securities ..............................              600,000              600,000                    -                    -
                                                           $8,722,956           $8,900,678           $1,349,936           $1,441,976
</Table>




                                       29
<Page>


                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
            Notes to the Consolidated Financial Statements, Continued
                           December 31, 2001 and 2000


Note 3 - Securities, continued

At  December  31,  2001,  securities  with a  carrying  value  of  approximately
$8,000,000 were pledged to secure public funds, retail repurchase agreements and
Treasury, tax and loan deposits.


Note 4 - Loans and allowance for loan losses

Loans at December 31, 2001 and 2000 are summarized as follows

                                                      2001             2000
                                                      ----             ----
Construction and land development ........     $  13,097,957      $  11,349,351
1-4 Family residential properties ........        25,378,155         16,803,152
Multifamily residential properties .......         1,155,954          1,557,548
Nonfarm nonresidential properties ........        48,595,504         28,367,706
Other real estate loans ..................         1,038,860            544,143
Commercial and industrial ................        36,220,643         23,564,652
Consumer .................................           629,235            460,842
Other ....................................            49,738            191,034
                                               -------------      -------------
Total loans ..............................       126,166,046         82,838,428
Less:  Allowance for loan losses .........        (1,450,000)        (1,055,000)
Net deferred loan fees ...................          (103,325)           (40,975)
                                               -------------      -------------
                                               $ 124,612,721      $  81,742,453
                                               =============      =============

The  activity  in the  allowance  for loan  losses  for  2001,  2000 and 1999 is
summarized as follows:

                                             2001         2000          1999
                                             ----         ----          ----

Balance at beginning of year ........    $1,055,000    $  800,000    $  575,000
Provision charged to operations .....       445,853       254,855       225,270
Loan charge-offs ....................        51,670             -          (400)
Loan recoveries .....................           817           145           130
                                         ----------    ----------    ----------
Balance at end of year ..............    $1,450,000    $1,055,000    $  800,000
                                         ==========    ==========    ==========

At  December  31, 2001 and 2000,  nonaccrual  loans  amounted  to  $396,232  and
$287,662,  respectively.  There were no impaired  loans at December 31, 2001 and
2000.

At December 31, 2001, the Company had loans outstanding to officers,  directors,
and their related interests of $6,189,850. During 2001, directors, officers, and
their related interests borrowed  $4,454,255 and repaid $3,516,888.  At December
31, 2000, the Company had loans  outstanding to officers,  directors,  and their
related interests of $5,252,483.  During 2000,  directors,  officers,  and their
related interests borrowed $5,475,440 and repaid $5,851,691.





                                       30
<Page>


                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
            Notes to the Consolidated Financial Statements, Continued
                           December 31, 2001 and 2000


Note 4 - Loans and allowance for loan losses, continued

In the normal  course of  business  there are  outstanding  commitments  for the
extension of credit  which are not  reflected in the  financial  statements.  At
December  31, 2001 and 2000,  pre-approved  but unused lines of credit for loans
totaled approximately  $18,451,000 and $17,137,000,  respectively.  In addition,
the Company had issued  standby  letters of credit  amounting  to  approximately
$947,000  and  $1,481,500  at December  31, 2001 and 2000,  respectively.  These
commitments  represent  no more than the normal  lending  risk that the  Company
commits to its  borrowers.  If these  commitments  are drawn,  the Company  will
obtain  collateral  if it is  deemed  necessary  based  on  management's  credit
evaluation of the counterparty.  Management  believes that these commitments can
be funded through normal operations.

The Company grants primarily  commercial,  real estate, and installment loans to
customers  throughout its market area,  which consists  primarily of Spartanburg
and  Richland  Counties  in South  Carolina.  The real estate  portfolio  can be
affected by the condition of the local real estate  market.  The  commercial and
installment loan portfolio can be affected by the local economic conditions.


Note 5 - Premises and equipment

Premises and equipment at December 31, 2001 and 2000 are summarized as follows:

                                                     2001               2000
                                                     ----               ----

Land .....................................       $   431,412        $   431,412
Buildings ................................         2,253,509          2,201,620
Leasehold Improvements ...................            93,590             93,590
Furniture and equipment ..................           971,529            849,379
                                                 -----------        -----------
                                                   3,750,040          3,576,001

Less: accumulated depreciation ...........          (873,811)          (670,263)
                                                 -----------        ===========
                                                 $ 2,876,229        $ 2,905,738
                                                 ===========        ===========


Depreciation  expense  for the years  ended  2001,  2000 and 1999 was  $203,548,
$201,978, and $172,027, respectively.




                                       31
<Page>

                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
            Notes to the Consolidated Financial Statements, Continued
                           December 31, 2001 and 2000


Note 6 - Deposits

A summary of deposit accounts at December 31, 2001 and 2000 follows:

                                                     2001                2000
                                                     ----                ----
Demand
     Non-interest bearing ..............        $  9,730,668        $  6,355,462
     Interest bearing ..................          25,806,825          26,032,496
Savings ................................           2,770,861           2,240,460
Time, $100,000 or more .................          14,947,277          18,501,960
Other time .............................          64,027,445          45,455,132
                                                ------------        ------------
                                                $117,283,076        $ 98,585,510
                                                ============        ============

At December 31, 2001, the scheduled maturities of time deposits are as follows:

2002                                                         $75,871,000
2003                                                           2,779,000
2004                                                             125,000
2005                                                             100,000
2006 and thereafter                                              100,000
                                                      ------------------
                                                             $78,975,000
                                                      ==================

Directors and executive officers were customers of and had transactions with the
Bank in the  ordinary  course of  business.  Included in such  transactions  are
deposit  accounts,  all of which were made under  normal  terms.  The  aggregate
amount of these deposit  accounts was  $1,257,879 and $3,121,000 at December 31,
2001 and 2000, respectively.


Note 7 - Other borrowed funds

At December 31, 2001, the Bank had two $5,000,000 advances  outstanding from the
Federal Home Loan Bank ("FHLB").  The borrowings  carried interest rates of 4.3%
and 4.6% and mature in February and March of 2011.  At December  31,  2000,  the
Bank had no advances outstanding from the FHLB.

At December 31, 2001 and 2000, the Bank had $5,500,000 in unused lines of credit
to purchase federal funds from banks.






                                       32
<Page>

                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
            Notes to the Consolidated Financial Statements, Continued
                           December 31, 2001 and 2000


Note 8 - Regulatory capital requirements

The Company and the Bank are subject to various regulatory capital  requirements
administered  by the federal banking  agencies.  Failure to meet minimum capital
requirements   can  initiate   certain   mandatory   and   possible   additional
discretionary  actions by regulators  that, if  undertaken,  could have a direct
material  effect on the  Company  and the  Bank's  financial  statements.  Under
capital adequacy  guidelines and the regulatory  framework for prompt corrective
action,  the Company and the Bank must meet  specific  capital  guidelines  that
involve  quantitative  measures  of  their  assets,  liabilities,   and  certain
off-balance-sheet items as calculated under regulatory accounting practices. The
capital amounts and classifications are also subject to qualitative judgments by
the regulators  about  components,  risk  weighting,  and other factors.  Prompt
corrective action provisions are not applicable to bank holding companies.

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Company  and the Bank to  maintain  minimum  amounts and ratios (set
forth in the  table  below)  of total  and Tier I  capital  (as  defined  in the
regulations)  to  risk-weighted  assets (as defined),  and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of December 31,
2001  and  2000,  that  the  Company  and  the  Bank  met all  capital  adequacy
requirements to which it is subject.

As of December 31, 2001, the most recent  notification from the FDIC categorized
the  Bank  as  well  capitalized  under  the  regulatory  framework  for  prompt
corrective  action.  To be categorized as adequately  capitalized  the Bank must
maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios
as set  forth in the  table.  There  are no  conditions  or  events  since  that
notification  that  management  believes have changed the Bank's  category.  The
Company and the Bank's actual capital amounts and ratios as of December 31, 2001
and 2000 are also presented in the table.

<Table>
<Caption>
                                                                                                                    To be Well
                                                                                                                 Capitalized Under
                                                                                       For Capital               Prompt Corrective
                                                               Actual               Adequacy Purposes            Action Provisions
                                                      Amount          Ratio        Amount         Ratio         Amount         Ratio
                                                      ------          -----        ------         -----         ------         -----

<S>                                                <C>               <C>         <C>              <C>        <C>              <C>
December 31, 2001 ..........................       $14,249,000       11.4%       $10,003,000      >8.0%      $12,504,000      >10.0%
Total Capital
   (To Risk Weighted Assets)
   Tier I Capital ..........................       $12,799,000       10.2%       $ 5,001,000      >4.0%      $ 7,502,000      > 6.0%
     (To Risk Weighted Assets)
   Tier I Capital ..........................       $12,799,000        9.1%       $ 5,650,000      >4.0%      $ 7,062,000      > 5.0%
     (To Average Assets)
December 31, 2000 ..........................       $12,948,000       14.8%       $ 6,996,000      >8.0%      $ 8,745,000      >10.0%
     Total Capital
     (To Risk Weighted Assets)
   Tier I Capital ..........................       $11,893,000       13.6%         3,498,000      >4.0%      $ 5,247,000      > 6.0%
     (To Risk Weighted Assets)
   Tier I Capital ..........................       $11,893,000       12.4%         3,852,000      >4.0%      $ 4,815,000      > 5.0%
     (To Average Assets)
</Table>
-----------------------------




                                       33
<Page>

                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
            Notes to the Consolidated Financial Statements, Continued
                           December 31, 2001 and 2000

Note 9 - Income taxes

The provision for income taxes is summarized below:

                                         2001             2000            1999
                                         ----             ----            ----
Currently payable
Federal ........................      $ 571,902       $ 427,182       $ 181,931
    State ......................         40,673          33,282          21,548
                                      ---------       ---------       ---------
                                        612,575         460,464         203,479

Deferred
Federal ........................       (177,856)        (89,861)       (196,632)
    State ......................        (20,144)         (6,139)         (5,668)
                                      ---------       ---------       ---------
                                       (198,000)        (96,000)       (202,300)
                                      ---------       ---------       ---------

    Total income taxes .........      $ 414,575       $ 364,464       $   1,179
                                      =========       =========       =========



The reasons for the  difference  between the statutory  federal income tax rates
and the effective tax rates are summarized as follows for:

<Table>
<Caption>
                                                                                                        Years ended
                                                                                                        December 31,
                                                                                          2001               2000             1999
                                                                                          ----               ----             ----

<S>                                                                                       <C>                <C>             <C>
       Statutory rates ....................................................               34.0%              34.0%            34.0%
       Increase (decrease) resulting from:
              State taxes, net of federal benefit .........................               (2.0%)             (3.1%)           (3.1%)
              Effect of tax exempt interest and dividends .................               (1.5%)             (1.7%)           (1.4%)
              Life Insurance ..............................................               (3.2%)             (3.7%)           (1.0%)
              Change in valuation allowance ...............................                -                  -              (30.8%)
       Other, net .........................................................                4.1%               6.3%             2.3%

                                                                                          31.4%              31.8%               -%
</Table>

The tax  effects of  temporary  differences  result in  deferred  tax assets and
liabilities as presented below:

                                                           2001          2000
                                                           ----          ----
Deferred tax assets
   Allowance for loan losses .......................    $ 433,000     $ 359,000
   Loan fee deferral ...............................       40,000        16,000
   Unrealized loss on securities
       available for sale ..........................            -         2,000
   Start-up costs amortization .....................            -        18,000
   Other ...........................................       23,000        13,000
       Gross deferred tax assets ...................      496,000       408,000
   Less valuation allowance ........................       (1,300)       (1,300)
                 Net deferred tax assets ...........      494,700       406,700

Deferred tax liabilities ...........................      (65,700)      (31,000)

       Net .........................................    $ 429,000     $ 375,700




                                       34
<Page>


                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
            Notes to the Consolidated Financial Statements, Continued
                           December 31, 2001 and 2000


Note 10 - Operating leases

The  Company  leases the land and  building  for its  branches  under  operating
leases. Future minimum lease payments at December 31, 2001, are as follows:

2002 ...............................      $121,680
2003 ...............................       112,434
2004 ...............................        77,686
2005 and thereafter ................             -
                                          --------
                                          $311,800
                                          ========

Total lease expense was $120,062,  $112,434 and $59,642 for 2001, 2000 and 1999,
respectively.


Note 11 - Restrictions on dividends, loans and advances,

Federal and state banking  regulations  place certain  restrictions on dividends
paid and loans or advances made by the Bank to the Corporation. The total amount
of dividends which may be paid at any date is generally  limited to the retained
earnings  of the Bank,  and loans or  advances  are limited to 10 percent of the
Bank's common stock and surplus on a secured basis.

In addition,  dividends paid by the Bank to the Corporation  would be prohibited
if the effect  would  cause the Bank's  capital to be reduced  below  applicable
minimum regulatory capital requirements.


Note 12 - Employee benefit plan

401(k) plan
All employees of the Company who meet certain eligibility criteria are permitted
to participate in a 401(k) plan. For each employee's  contribution up to 6%, the
Company makes a 100%  matching  contribution.  Expense  related to this plan was
$68,052, $48,982 and $37,188 in 2001, 2000 and 1999, respectively.

(a)      Salary continuation plan
During 1999,  the Company  entered  into a salary  continuation  agreement  with
certain officers of the Company. The plan provides for a series of payments over
a  specified  number of periods to these  employees  upon  their  retirement  or
termination  as stated in the  plan.  The  amount  of  accrued  benefit  expense
included in other  liabilities  was $59,306 and $31,934 at December 31, 2001 and
2000, respectively.



                                       35
<Page>


                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
            Notes to the Consolidated Financial Statements, Continued
                           December 31, 2001 and 2000


Note 13 - Stock options

The  Company  has  issued  incentive  stock  options  to  certain  officers  and
employees.  These  options  are  accounted  for  under  the  provisions  of FASB
Statement No. 123,  Accounting  for  Stock-Based  Compensation.  As permitted by
Statement  No. 123,  the Company has elected to continue  using the  measurement
method   prescribed  in  Accounting   Principles   Board  Opinion  No.  25  and,
accordingly, Statement No. 123 has no effect on the Company's financial position
or results of operations.

The following is a summary of stock option activity and related  information for
the years ended December 31, 2001, 2000 and 1999:

<Table>
<Caption>
                                                            2001                         2000                     1999
                                                            ----                         ----                     ----
                                                                Weighted                       Weighted                  Weighted
                                                                 Average                        Average                  Average
                                                    Options   Exercise Price    Options     Exercise Price   Options  Exercise Price
                                                    -------   --------------    -------     --------------   -------  --------------

<S>                                                 <C>          <C>            <C>           <C>            <C>           <C>
Outstanding- Beginning
   of period ..............................         71,628       $   14.23      58,100        $   13.76      37,992        $   12.10
   Granted ................................         22,487       $    9.42      15,178            17.01      20,208            16.89
   Exercised ..............................              -               -        (600)           11.42        (100)           11.00
   Forfeited ..............................              -               -      (1,050)           16.64           -                -
                                                    ------       ---------      ------        ---------      ------        ---------
Outstanding- End of Period ................         94,115           15.62      71,628        $   14.23      58,100        $   13.76

Exercisable- End of Period.................         53,397       $   13.74      38,505        $   12.59      30,720        $   11.70

Weighted average fair
   value of options granted ...............                      $    8.73                    $    8.32                    $    8.43
</Table>

Exercise prices for options  outstanding as of December 31, 2001 and 2000 ranged
from $11.00 to $21.00. The weighted average remaining  contractual life of those
options is approximately 8 years at December 31, 2001 and 2000.



                                       36
<Page>

                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
            Notes to the Consolidated Financial Statements, Continued
                           December 31, 2001 and 2000


Note 13 - Stock options, continued

Because the Company had adopted the disclosure  only provisions of Statement No.
123, no  compensation  cost has been  recognized  for the stock option plan. Had
compensation  cost for the Company's stock option plan been determined  based on
the fair value at the grant date of the awards consistent with the provisions of
Statement  No. 123, the Company's net earnings and earnings per share would have
decreased to the pro forma amounts indicated below:

<Table>
<Caption>
                                                                                     2001               2000                  1999
                                                                                     ----               ----                  ----
<S>                                                                            <C>                  <C>                  <C>
Net income - as reported ............................................          $   905,835          $   781,730          $   505,012
Net income - pro forma ..............................................              778,241              728,897              480,678
Earnings per common share - as reported .............................                  .99                  .85                  .55
Earnings per common share - pro forma ...............................                  .85                  .79                  .53
Diluted earnings per common share - as reported .....................                  .97                  .84                  .54
Diluted earnings per common share - pro forma .......................                  .83                  .78                  .51
</Table>

The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes   option-pricing   model  with  the  following   weighted  average
assumptions  used for  grants  in 2001,  2000 and  1999;  dividend  yield of 0%,
expected  volatility of 20%, risk-free interest rates of 5.00% in 2001, 6.00% in
2000 and 6.25% in 1999, and expected lives of 10 years for the options.

Note 14 - Fair value of financial instruments

The estimated fair value of financial instruments are as follows:

<Table>
<Caption>
                                                                                2001                               2000
                                                                                ----                               ----
                                                                    Carrying          Estimated           Carrying       Estimated
                                                                      Amount          Fair Value           Amount       Fair Value
                                                                      ------          ----------           ------       ----------
                                                                                               (in thousands)

Financial assets
<S>                                                                <C>                <C>                <C>                <C>
   Cash and cash equivalents ...........................           $  6,439           $  6,439           $ 10,898           $ 10,898
   Securities
      Available-for-sale ...............................              8,901              8,901             12,282             12,282
           Held for investment 1,350 ...................              1,442              4,349              4,433
   Loans ...............................................            126,166            126,560             82,838             81,565

Financial liabilities
   Deposits ............................................            117,283            118,207             98,586             98,586
   Retail repurchase agreements ........................              5,209              5,209              2,553              2,553
   Other borrowed funds ................................             10,000             10,518                  -                  -
</Table>






                                       37
<Page>


                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
            Notes to the Consolidated Financial Statements, Continued
                           December 31, 2001 and 2000


Note 14 - Fair value of financial instruments, continued

The fair value  estimates are made at a specific point in time based on relevant
market and other information about the financial instruments.  Because no market
exists for a significant  portion of the Company's financial  instruments,  fair
value  estimates  are  based  on  judgments   regarding   future  expected  loss
experience,   current  economic  conditions,  risk  characteristics  of  various
financial instruments, and such other factors. These estimates are subjective in
nature and  involve  uncertainties  and  matters  of  significant  judgment  and
therefore  cannot be determined  with  precision.  Changes in assumptions  could
significantly affect the estimates.  In addition,  the tax ramifications related
to the  realization  of the  unrealized  gains and losses can have a significant
effect on fair value estimates and have not been considered in the estimates.


Note 15 - Earnings per common share (EPS)

The reconciliation of the numerators and denominators of the earnings per common
share and diluted EPS computation follows:

<Table>
<Caption>
                                                                                                                               Per
                                                                                   Income                 Shares              Share
December 31, 2001                                                                 (Numerator)          (Denominator)          Amount
                                                                                  -----------          -------------          ------

           Earnings per common share:
<S>                                                                                <C>                    <C>               <C>
           Income available to common
               stockholders .........................................              $905,835               917,780           $   .99
           Effect of dilutive securities
               Stock options ........................................                     -                18,387              (.02)
                                                                                   --------              --------              ----

Diluted EPS:
           Income available to common
               stockholders + assumed
               conversions ..........................................              $905,835               936,167           $   .97
                                                                                   ========              ========           =======
</Table>


Options to purchase  400 shares of common  stock at $20 per share and options to
purchase  11,700 shares of common stock at $21.00 per share were not included in
the  computation  of diluted  earnings  per share for 2001  because the options'
exercise price was greater than the average market price of the common shares.






                                       38
<Page>


                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
            Notes to the Consolidated Financial Statements, Continued
                           December 31, 2001 and 2000


Note 15 - Earnings per common share (EPS), continued

<Table>
<Caption>
                                                                                                                               Per
                                                                                   Income                 Shares              Share
December 31, 2000                                                                 (Numerator)          (Denominator)          Amount
                                                                                  -----------          -------------          ------

    Earnings per common share:
<S>                                                                              <C>                     <C>                <C>
    Income available to common
        stockholders .............................................               $781,730                917,780            $   .85
    Effect of dilutive securities
        Stock options ............................................                      -                 10,784               (.01)
                                                                                 --------               --------               ----

    Diluted EPS:
      Income available to common
        stockholders + assumed
        conversions ..............................................               $781,730                928,009            $   .84
                                                                                 ========               ========            =======
</Table>

Options to purchase  30,078 shares of common stock at $17 per share,  options to
purchase  300 shares of common stock at $17.25 per share and options to purchase
100  shares  of common  stock at  $17.63  per  share  were not  included  in the
computation of diluted earnings per share for 2000 because the options' exercise
price was greater than the average market price of the common shares.
<Table>
<Caption>
                                                                                                                             Per
                                                                                 Income                 Shares              Share
December 31, 1999                                                               (Numerator)          (Denominator)          Amount
                                                                                -----------          -------------          ------

   Earnings per common share:
<S>                                                                            <C>                      <C>                 <C>
   Income available to common
      stockholders ............................................                $505,012                 915,803             $   .55
   Effect of dilutive securities
      Stock options ...........................................                       -                  11,053                (.01)
                                                                               --------                --------                ----

    Diluted EPS:
    Income available to common
      stockholders + assumed
      conversions .............................................                $505,012                 926,856             $   .54
                                                                               ========                ========             =======
</Table>



All options to purchase  shares of common stock were included in the computation
of diluted  earnings  per share in 1999 as all options  were  dilutive for those
periods.






                                       39
<Page>


                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
            Notes to the Consolidated Financial Statements, Continued
                           December 31, 2001 and 2000


Note 16 - Condensed financial statements of parent company

Financial information pertaining to First South Bancorp, Inc. is as follows:

Balance Sheet

<Table>
<Caption>
                                                                                                            December 31,
                                                                                                            ------------
                                                                                                  2001                      2000
                                                                                                  ----                      ----
Assets
<S>                                                                                            <C>                       <C>
Investment in common stock of First South Bank .................................               $12,908,953               $11,889,944
                                                                                               -----------               -----------
    Total assets ...............................................................               $12,908,953               $11,889,944
                                                                                               ===========               ===========

Stockholders' Equity
Stockholders' equity ...........................................................               $12,908,953               $11,889,944
                                                                                               -----------               -----------
    Total stockholders' equity .................................................               $12,908,953               $11,889,944
                                                                                               ===========               ===========
</Table>

                             Statement of Operations

<Table>
<Caption>
                                                                                                   Year Ended December 31,
                                                                                                   -----------------------
                                                                                                 2001                   2000
                                                                                                 ----                   ----
Income
<S>                                                                                            <C>                    <C>
    Operating income .................................................................         $      -               $      -

Expense
    Other expenses ...................................................................                -                      -
                                                                                               --------               --------

Loss before equity in undistributed net income
    of First South Bank ..............................................................                -                      -
Equity in undistributed net income of First South Bank ...............................          905,835                781,730
                                                                                               --------               --------

Net income ...........................................................................         $905,835               $781,730
                                                                                               ========               ========
</Table>


Note 17 - Noncash transactions

There were no noncash  transactions during the year ended December 31, 2001. The
Company  foreclosed  on assets  during  the year  ended  December  31,  2000 and
transferred the loans and accrued  interest  balances at the time of foreclosure
to other real estate owned in the amount of $1,110,961.



                                       40
<Page>


Item 8.  Changes  In  and  Disagreements  With  Accountants  on  Accounting  and
         Financial Disclosure.

         Not Applicable.

                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
        With Section 16(a) of the Exchange Act.

         The  information  set  forth  under  the  captions  "Management  of the
Company"  and "Section  16(a)  Beneficial  Ownership  Reporting  Compliance"  in
registrant's  definitive  proxy statement filed with the Commission for the 2002
Annual Meeting of Shareholders is incorporated herein by reference.

Item 10. Executive Compensation.

         The information set forth under the captions "Management Compensation,"
"Retirement  Benefits" and "Stock Option Plan" in registrant's  definitive proxy
statement  filed with the Commission for the 2002 Annual Meeting of Shareholders
is incorporated herein by reference.

Item 11. Security Ownership of Certain Beneficial Owners and Management.

         The  information  set forth under the caption  "Security  Ownership  of
Certain  Beneficial  Owners and  Management" in  registrant's  definitive  proxy
statement  filed with the Commission for the 2002 Annual Meeting of Shareholders
is incorporated herein by reference.

Item 12. Certain Relationships and Related Transactions.

         The information set forth under the caption "Certain  Relationships and
Related Transactions" in registrant's  definitive proxy statement filed with the
Commission for the 2002 Annual Meeting of Shareholders is incorporated herein by
reference.

Item 13. Exhibits and Reports on Form 8-K.

(a)      Description of Exhibits.

Exhibit No.                Description

3.1                       Articles of Incorporation of Registrant (1)
3.2                       Bylaws of Registrant (1)
4.1                       Form of Common Stock Certificate(2)
10.1                      First South Bank Stock Option Plan (3)
10.2                      Form of Option  Agreements with Barry L. Slider, dated
                          as of December 31, 1998,  December 31, 1997
                          and December 31, 1996. (3)
10.3                      Option Agreement with  Barry  L. Slider, dated  as  of
                          April 17, 1997(2)
10.4                      Form of Salary  Continuation  Agreements with Barry L.
                          Slider and V. Lewis Shuler dated November 19, 1999.(2)
21                        Subsidiaries of Registrant(3)
---------------

(1)  Incorporated by reference to Form 8-A filed November 12, 1999
(2)  Incorporated  by reference  to Form 10-KSB for the year ended  December 31,
     2000
(3)  Incorporated  by reference  to Form 10-KSB for the year ended  December 31,
     1999

(b)      Reports on Form 8.K.



                                       41
<Page>



         No  reports  on Form 8-K were  filed by the  registrant  in the  fourth
quarter of 2001.


<Page>

                                   SIGNATURES

         In  accordance  with  Section  13 or 15(d)  of the  Exchange  Act,  the
registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized.

                                      First South Bancorp, Inc.
March 27, 2002
                                      By: s/Barry L. Slider
                                         ---------------------------------------
                                         Barry L. Slider
                                         President and Chief Executive Officer


                                      By: s/ V. Lewis Shuler
                                         ---------------------------------------
                                         V. Lewis Shuler
                                         Executive Vice President
                                         (Principal Financial and Principal
                                          Accounting Officer)


         In accordance  with the Exchange Act, this Report has been signed below
by the following  persons on behalf of the  registrant and in the capacities and
on the dates indicated:
<Table>
<Caption>

Signature                                Title                                              Date
---------                                -----                                              ----

<S>                                      <C>                                                <C>
s/Richard H. Brooks
__________________________               Director                                           March 27, 2002
Richard H. Brooks

s/Harold E. Fleming, M.D.
__________________________               Director                                           March 27, 2002
Harold E. Fleming, M.D.

s/Joel C. Griffin
__________________________               Director                                           March 27, 2002
Joel C. Griffin


__________________________               Chairman, Director                                 March 27, 2002
Roger A. F. Habisreutinger


__________________________               Director                                           March 27, 2002
Ashley F. Houser


__________________________               Director                                           March 27, 2002
Herman E. Ratchford

s/Chandrakant V. Shanbhag
__________________________               Director                                           March 27, 2002
Chandrakant V. Shanbhag

s/Barry L. Slider
__________________________               President, Chief Executive Officer, Director       March 27, 2002
Barry L. Slider

s/David G. White
__________________________               Director                                           March 27, 2002
David G. White
</Table>

                                       42