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, 1999                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 Identification Number)
  Incorporation or Organization)

             1450 Reidville Road, 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 $5,244,968.

         The aggregate  market value of the Common Stock held by  non-affiliates
on February 29, 2000, was  approximately  $10,909,827.  As of February 29, 2000,
there  were  917,180  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 2000 Annual Meeting of
     Shareholders - Part III

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


<PAGE>


                                     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,  located in Spartanburg,  South Carolina.  In 1999, the
Bank received approval to open a branch in Columbia, South Carolina and plans to
open that branch in March, 2000.

         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   County  and  makes  other  authorized
investments.  Mortgage  loans are  primarily  made for  resale in the  secondary
market. As of December 31, 1999, the Bank employed 24 (FTE) persons.

Competition

         Competition between commercial banks and thrift  institutions  (savings
and loan  associations)  and credit unions has  intensified  significantly  as a
result of the  elimination  of many  previous  distinctions  between the various
types of financial institutions,  and the expanded powers and increased activity
of thrift  institutions  in areas of banking that  previously  had been the sole
domain of commercial banks. Recent  legislation,  together with other regulatory
changes by the primary  regulators of the various  financial  institutions,  has
resulted in the elimination of many  distinctions  between a commercial bank and
thrift institution.  Consequently,  competition among financial  institutions of
all types is virtually unlimited with respect to legal authority to provide most
financial services.

         The Bank competes in the South Carolina city of Spartanburg,  for which
the most recent market share data available is as of June 1999. At that time, in
Spartanburg,  14 banks,  savings  and loans,  and  savings  banks with 53 branch
locations competed for aggregate deposits of approximately  $1.736 billion.  The
Bank has a city-wide  deposit  market share of 2.8% and a market share rank of 9
out of the 14 competitors.

         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.

<PAGE>

         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
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  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


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<PAGE>

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.

         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, 1999.

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.



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<PAGE>

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 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
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.



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<PAGE>

         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.

Recent Legislation

         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.  Most of the provisions of the Act require the
applicable   regulators  to  adopt  regulations  in  order  to  implement  these
provisions.

         Under provisions of the new legislation,  which are effective March 11,
2000, 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.

         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.



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<PAGE>

         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 will not go
into effect until after adoption of implementing  regulations by various federal
agencies.

         The Company  anticipates that the Act and the regulations  which are to
be 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  Reidville  Road,  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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<PAGE>

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 1999.

                                     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
the NASDAQ  National  Market  System,  nor are there any market  makers known to
management. During 1999, management was aware of a few transactions in which the
Company's  common  stock  traded in a range  from  $16.00 to $17.00  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 29, 2000, there were approximately 632 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.

         At December  31,  1999,  the Company  issued 1,319 shares of its common
stock to  directors  of the  Company in lieu of paying cash  director's  fees of
$22,483. The issuances were exempt from registration pursuant to Section 4(2) of
the Securities Act of 1933.

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,
1999,  of  $505,012,  or $0.55 per share,  compared to a net income for the year
ended December 31, 1998, of $104,030 or $0.15 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 $2,512,919 for 1999
as compared to $1,697,465  for 1998.  The Bank also had other  operating  income
(principally  service  charges,  fees and  commissions)  of $239,626 in 1999 and
$174,631 in 1998.  The Bank  provided  $225,270  and $227,507 to its reserve for
loan losses in 1999 and 1998,  respectively,  and had other  operating  expenses
(principally  salaries and benefits and  occupancy  and  equipment  expenses) of
$2,021,084 in 1999 and $1,512,209 in 1998.



                                       7
<PAGE>

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
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,  1998,  net  interest  income was
$1,697,465.  For the year ended  December  31,  1999,  net  interest  income was
$2,512,919. This increase was primarily attributable to an increase in volume as
average  interest  earning assets  increased 39.8% and average  interest bearing
liabilities  increased  37.2% from 1998 to 1999.  The average  yield on interest
earning  assets  decreased  from  8.57% to 8.35%  from  1998 to 1999,  while the
average cost of interest bearing liabilities decreased from 5.46% to 5.02%. As a
result, the net yield on average interest earning assets increased from 3.96% in
1998 to 4.19% in 1999.

         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, 1999
and 1998.



                                       8
<PAGE>

                       Average Balances, Yields and Rates
                             (Dollars in Thousands)

<TABLE>
<CAPTION>
                                                                                    Year Ended December 31,
                                                                                    -----------------------
                                                                            1999                                  1998
                                                                            -----                                 ----
                                                                           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 .....................................     $  4,000      $    195     4.88%      $  4,721      $    253      5.36%
Investment securities ..................................       11,103           638     5.75%         8,915           542      6.08%
Loans(2) ...............................................       44,821         4,172     9.31%        29,226         2,879      9.85%
                                                             --------      --------                --------      --------
  Total interest earning assets ........................       59,924         5,005     8.35%        42,862         3,674      8.57%
Cash and due from banks ................................        1,335                                 1,217
Valuation reserve for investment securities ............         (158)                                    0
Allowance for loan losses ..............................         (647)                                 (462)
Premises and equipment .................................        2,829                                 2,921
Other assets ...........................................          913                                   406
                                                             --------                              --------
   Total assets .........................................    $ 64,196                              $ 46,944
                                                             ========                              ========
Liabilities and shareholders' equity
  Interest bearing transaction accounts ................     $ 15,060      $    679     4.51%      $ 10,131      $    486      4.80%
  Savings ..............................................        1,120            30     2.68%           585            18      3.08%
  Time deposits $100M and over .........................        8,411           441     5.24%         6,597           385      5.84%
  Other time deposits ..................................       23,060         1,253     5.43%        17,298         1,020      5.90%
                                                             --------      --------                --------      --------
    Total interest bearing deposits ....................       47,651         2,403     5.04%        34,611         1,909      5.52%
Retail repurchase agreements ...........................        1,606            67     4.17%         1,584            68      4.29%
Other Borrowed Funds ...................................          415            22     5.30%             -             -      0.00%
                                                             --------      --------                --------      --------
    Total interest bearing liabilities .................       49,672         2,492     5.02%        36,195          1977      5.46%
Noninterest bearing demand deposits ....................        3,169                                 2,988
Other liabilities ......................................          648                                   479
Shareholders' equity ...................................       10,707                                 7,282
                                                             --------                              --------
   Total liabilities and shareholders' equity ...........    $ 64,196                              $ 46,944
                                                             ========                              ========
 Interest rate spread(3) ................................                                3.33%                                 3.11%
Net interest income and net yield on earning ...........                   $  2,513      4.19%                   $  1,697      3.96%
assets(4)
Interest free funds supporting
 earning assets(5) .....................................     $ 10,252                              $  6,667
</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 origination
     fee income.
(3)  Total  interest  earning  assets  yield  less the  total  interest  bearing
     liabilities rate.
(4)  Net interest income divided by total interest earning assets.
(5)  Total interest earning assets less total interest bearing liabilities.



                                       9
<PAGE>

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,
                                                  1999 compared to 1998
                                                Increase (Decrease) Due to
                                                --------------------------
                                                  (Dollars in Thousands)
                                            Volume           Rate         Change
                                            ------           ----         ------
Interest earned on:
  Investments ........................      $   133       $   (37)      $    96
  Federal Funds Sold .................          (39)          (19)          (58)
  Net Loans ..........................        1,536          (243)        1,293
                                            -------       -------       -------

Total Interest Income ................        1,630          (299)        1,331
                                            -------       -------       -------

Interest paid on:
  Interest Checking ..................          238           (45)          193
  Savings Deposits ...................           16            (3)           13
  Certificates of Deposit ............          445          (155)          290
                                            -------       -------       -------

  Retail Repurchase Agreements .......            6            (3)            3
  Other Borrowed Funds ...............           17             0            17
                                            -------       -------       -------

Total Interest Expense ...............          722          (206)          516
                                            -------       -------       -------

Change in Net Interest Income ........      $   908       $   (93)      $   815
                                            =======       =======       =======

         During the year  2000,  management  expects  that  interest  rates will
gradually increase.  Therefore, any improvements in net interest income for 2000
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  area  in
Spartanburg,  South  Carolina  and  its new  service  area  in  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,
1999 of $5.6  million  for a  cumulative  gap  ratio  of  1.11%.  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, 1999 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.



                                       10
<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 $702,000, are excluded from this table.

                          Interest Sensitivity Analysis

<TABLE>
<CAPTION>
                                                                                           December 31, 1999
                                                                                           -----------------
                                                                      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 ...................     $     12      $      0       $      0      $      0     $     12
   Federal funds sold .........................................        2,850             0              0             0        2,850
   Other investments ..........................................            0             0          9,163         1,498       10,661
   Loans
      Fixed rate ..............................................        2,829         2,465          3,224           586        9,104
      Variable rate ...........................................       47,898             0              0             0       47,898
                                                                    --------      --------       --------      --------     --------
        Total interest earning assets .........................     $ 53,589      $  2,465       $ 12,387      $  2,084     $ 70,525
                                                                    ========      ========       ========      ========     ========

Interest bearing liabilities
   Interest bearing deposits
      Interest bearing transaction accounts ...................       15,396             0              0             0       15,396
      Savings & MMIA ..........................................        1,927             0              0             0        1,927
      Time deposits $100M and over ............................          662         8,571          1,698             0       10,931
      Other time deposits .....................................          654        19,033          7,385             0       27,072
        Total interest bearing deposits .......................       18,639        27,604          9,083             0       55,326
      Repurchase agreements and other borrowed funds ..........        1,723             0              0             0        1,723
      Other borrowed Funds ....................................        2,500             0              0             0        2,500
                                                                    --------      --------       --------      --------     --------
        Total interest bearing liabilities ....................     $ 22,862      $ 27,604       $  9,083      $      0     $ 59,549
                                                                    ========      ========       ========      ========     ========

Interest sensitivity gap ......................................     $ 30,727      $(25,139)      $  3,304      $  2,084
Cumulative interest sensitivity gap ...........................     $ 30,727      $  5,588       $  8,892      $ 10,976
Gap ratio .....................................................         2.34%          .09%          1.36%
Cumulative gap ratio ..........................................         2.34%         1.11%          1.15%
</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 possible loan losses 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 future  losses.  The Bank provided  $225,270 and
$227,507 to the  allowance  during the years ended  December  31, 1999 and 1998,
respectively.



                                       11
<PAGE>

Other Expenses

         Other  expenses,  which  consist  primarily  of salaries  and  employee
benefits,  net occupancy,  and data processing expenses,  totaled $2,021,084 for
the year ended  December 31, 1999 as compared to  $1,512,209  for the year ended
December  31, 1998.  As a percentage  of total  operating  income (net  interest
income after provision for loan losses plus total other operating income), other
expenses  decreased from 91.9% for the year ended December 31, 1998 to 80.0% for
the year ended December 31, 1999. This improvement was primarily the result of a
substantial  increase in assets and customer  relationships  being  handled by a
staff that was only slightly larger.

Income Taxes

         During the year ended December 31, 1998,  the Bank accrued  $28,350 for
income taxes.  The Bank accrued  $203,479 for income taxes during 1999. 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
$202,300 being recognized in 1999.

Investment Portfolio

         As of December  31, 1999,  the Bank's  investment  portfolio  comprised
approximately  14.2% of its total assets.  The following  table  summarizes  the
carrying  value amounts of securities  held by the Bank at December 31, 1999 and
at December 31, 1998.

                        Securities Portfolio Composition

<TABLE>
<CAPTION>
                                                                December 31, 1999                   December 31, 1998
                                                        ----------------------------------   ---------------------------------
                                                                        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 ..........     $ 10,000      $   (301)     $  9,699     $ 10,000      $    (20)     $  9,980
    Municipal obligations ........................          123           (14)          109          123             2           125
    Restricted FHLB Stock ........................          163             -           163          105             -           105
                                                       --------      --------      --------     --------      --------      --------
                                                       $ 10,286      $   (315)     $  9,971     $ 10,228      $    (18)     $ 10,210
                                                       ========      ========      ========     ========      ========      ========
Held for investment:
    Municipal obligations ........................     $    375      $    (30)     $    345     $    375      $      8      $    383
                                                       --------      --------      --------     --------      --------      --------
                                                       $    375      $    (30)     $    345     $    375      $      8      $    383
                                                       ========      ========      ========     ========      ========      ========
</TABLE>

         The following table presents  maturities and weighted average yields of
debt securities at December 31, 1999.  Available-for-sale  securities are stated
at  estimated  fair  value  and held for  investment  securities  are  stated at
amortized cost.



                                       12
<PAGE>

                   Securities Portfolio Maturities and Yields

<TABLE>
<CAPTION>
                                                                                           December 31, 1999
                                                                                           -----------------
                                                                             Available                        Held for
                                                                              For Sale       Yield           Investment        Yield
                                                                              --------       -----           ----------        -----
                                                                                           (Dollars in thousands)
U. S. Government Agency obligations
<S>                                                                           <C>             <C>                <C>           <C>
         Due from one to five years ............................              $8,723          5.69%              $  -             -
         Due from five to ten years ............................                 967          6.41%                 -             -
                                                                              ------          5.76%              ----
                                                                               9,699                                -             -
                                                                              ------                             ----
Municipal obligations(1)
         Due after ten years ...................................                 109          5.00%               375          5.25%
                                                                              ------                             ----

Total
         Due from one to five years ............................               8,732          5.69%                 -             -
         Due from five to ten years ............................                 967          6.41%                 -             -
         Due after ten years ...................................                 109          5.00%               375          5.25%
                                                                              ------                             ----
                  Total ........................................              $9,808          5.75%               375          5.25%
___________________                                                           ======                             ====
</TABLE>
(1) Not adjusted for tax equivalency.

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, 1999,  and 1998,  are
shown in the following table according to type of loan:

                           Loan Portfolio Composition


                                                             December 31,
                                                             ------------
                                                      1999               1998
                                                      ----               ----

Commercial, financial and agricultural .....     $ 17,136,114      $  9,274,030
Real estate - construction .................        7,639,096         3,038,010
Real estate mortgage .......................       31,625,439        22,784,159
Consumer ...................................          600,794           763,013
                                                 ------------      ------------
     Total loans ...........................       57,001,443        35,859,212

Less allowance for loan losses .............         (800,000)         (575,000)
                                                 ------------      ------------

                                           .     $ 56,201,443      $ 35,284,212
                                                 ============      ============

         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.


                                       13
<PAGE>

         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
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 64% of the
Bank's loan  portfolio  at December  31,  1999.  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.

Maturity and Interest Sensitivity Distribution of Loans

         The  following  table  sets  forth  the  maturity  distribution  of the
Company's  loans, by type, at December 31, 1999, as well as the type of interest
requirement on such loans.

<TABLE>
<CAPTION>
                                                                             December 31, 1999
                                                         One Year          One to        Five Years
                                                          Or Less        Five Years       Or More          Total
                                                          -------        ----------       -------          -----
                                                                          (Dollars in thousands)

<S>
<S>                                                      <C>             <C>             <C>              <C>
Commercial, financial and industrial                     $ 12,247        $ 4,705         $  184           $17,136
Real estate - construction                                  6,510          1,129              0             7,639
Real estate - mortgage                                      9,396         15,206          7,023            31,625
Consumer installment                                          152            449              0               601
                                                         --------        -------         ------           -------
         Total loans                                     $ 28,305        $21,489         $7,207           $57,001

Predetermined rate, maturity greater  than one year      $ 3,810

Variable rate or maturity within one year                $53,191


Nonperforming Loans; Other Problem Assets
</TABLE>

         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


                                       14
<PAGE>

are current and the borrower  has  demonstrated  the ability to continue  making
payments  as agreed.  At  December  31,  1999,  the Bank had two loans  totaling
$702,000  past due 90 days or  longer  and on  nonaccrual  status.  One of these
loans,  with a  balance  of  $681,000,  carried  an 80%  guarantee  by the  U.S.
Government. Had these loans been current in accordance with their original terms
$34,399 of additional interest income would have been recorded in 1999.

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.  The
total amount of loans determined by management to be a potential problem was one
loan with a balance of less than $1,500 at December 31, 1999.

Real Estate Owned

         The  Bank  had  no  real  estate  owned   pursuant  to  foreclosure  or
in-substance  foreclosure  at December 31, 1999.  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.

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, 1999.

         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.



                                       15
<PAGE>

                         Summary of Loan Loss Experience

<TABLE>
<CAPTION>
                                                                                                         Year Ended
                                                                                                         ----------
                                                                                         December 31, 1999         December 31, 1998
                                                                                         -----------------         -----------------
                                                                                                    (Dollars in thousands)

<S>                                                                                            <C>                          <C>
Total loans outstanding at end of period .............................................         $57,001                      $35,859
Average amount of loans outstanding ..................................................          44,821                       29,226

Balance of allowance for loan losses - beginning .....................................         $   575                      $   350
                                                                                               -------                      -------
Loans charged off
     Consumer installment ............................................................               0                            3
        Total charge-offs ............................................................               0                            3
Recoveries of loans previously charged-off
     Consumer installment ............................................................               0                            0
Net charge-offs ......................................................................               0                            3
                                                                                               -------                      -------

Additions to allowance charged to expense ............................................             225                          228
                                                                                               -------                      -------

Balance of allowance for loan losses - ending ........................................         $   800                      $   575
                                                                                               =======                      =======

Ratios
     Net charge-offs during period to average
        loans outstanding during period ..............................................            0.00%                        0.01%
     Net charge-offs to loans at end of period .......................................            0.00%                        0.01%
     Allowance for loan losses to average loans ......................................            1.78%                        1.97%
     Allowance for loan losses to loans at end of period .............................            1.40%                        1.60%
     Allowance for loan losses to nonperforming loans
        at end of period .............................................................            1.14%                         N/A
     Net charge-offs to allowance for loan losses ....................................            0.00%                        0.52%
     Net charge-offs to provision for loan losses ....................................            0.12%                        1.32%
</TABLE>

     The  following  table  presents the  allocation  of the  allowance for loan
losses at the end of the years ended  December 31, 1999 and 1998,  compared with
the percent of loans in the applicable categories to total loans.

                     Allocation of Allowance for Loan Losses

<TABLE>
<CAPTION>
                                                                                         Year Ended December 31,
                                                                               1999                                   1998
                                                                               ----                                   ----
                                                                    Amount            % of Loans           Amount         % of Loans
                                                                    ------            ----------           ------         ----------
                                                                                            (Dollars in thousands)
<S>                                                                   <C>                <C>                <C>                <C>
Commercial and industrial ..............................              $219               30.1%              $155               25.9%
Real Estate - construction .............................                95               13.4%                65                8.5%
Real Estate - mortgage .................................               474               55.5%               340               63.5%
Consumer installment ...................................                12                1.1%                15                2.1%
                                                                      ----               ----               ----               ----
     Total .............................................              $800                100%              $575                100%
                                                                      ====                ===               ====                ===
</TABLE>



                                       16
<PAGE>

Deposits

         The average amounts and percentage  composition of deposits held by the
Bank for the years ended December 31, 1999 and 1998 are summarized below:

                                Average Deposits

<TABLE>
<CAPTION>
                                                                            December 31, 1999                  December 31, 1998
                                                                            -----------------                  -----------------
                                                                         Amount                %            Amount              %
                                                                         ------             ------          ------            -----
                                                                                       (Dollars in thousands)

<S>                                                                       <C>               <C>              <C>               <C>
Noninterest bearing demand ...................................             3,169              6.2             2,988              7.9
Interest bearing transaction accounts ........................            15,060             29.6            10,131             26.9
Savings & MMIA ...............................................             1,120              2.2               585              1.6
Time deposits - $100M and over ...............................             8,411             16.6             6,597             17.6
Other time deposits ..........................................            23,060             45.4            17,298             46.0
                                                                          ------            -----            ------            -----

         Total deposits ......................................            50,820            100.0            37,599            100.0
                                                                          ======            =====            ======            =====
</TABLE>

         As of December 31, 1999, the Bank held  $10,930,851 in time deposits of
$100,000 or more,  with  approximately  $662,000  with  maturities  within three
months,  $2,099,000 with  maturities  over three through six months,  $6,472,000
with maturities  over six through twelve months,  and $1,698,000 with maturities
over twelve months.  Wholesale  time deposits  (certificates  generated  through
corporations,  banks, credit unions, etc., on a national level) totaled $492,000
as of December 31, 1999. 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.

                                                Year Ended December 31,
                                                -----------------------
                                                  1999            1998
                                                  ----            ----

              Return on assets                    0.78%           0.22%
              Return on equity                    4.72%           1.43%
              Dividend payout ratio               0.00%           0.00%
              Equity to asset ratio              16.68%          15.51%



                                       17
<PAGE>

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 52.5% of total assets at December 31, 1999. 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 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.

Capital Resources

         The equity capital of the Bank increased by $3,886,597  during 1998 and
increased  $344,497  during  1999 as the  result of net  income  and the sale of
$23,607 of common  stock from the  exercise of options and payment of  directors
fees in stock in lieu of cash, and ($184,122) in comprehensive income.

         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 Improvement 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,  1999  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, 1999
<S>                                                 <C>              <C>         <C>              <C>        <C>              <C>
   Total Capital (to risk
      weighted assets) ....................         $11,861          19.6%       $ 4,844          8.0%       $ 6,055          10.0%
   Tier 1 Capital (to risk
      weighted assets) ....................          11,104          18.3%         2,422          4.0          3,633           6.0
   Tier 1 Capital (to average
      assets)(leverage) ...................          11,104          14.9%         2,977          4.0          3,721           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.


                                       18
<PAGE>

         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  will result in increased
operating expenses.

Item 7.  Financial Statements.

                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY

                                    Contents

                                                                          Page
Independent Auditors' Report                                                20
Consolidated Balance Sheets                                                 21
Consolidated Statements of Operations                                       22
Consolidated Statements of Changes in Stockholders' Equity                  23
Consolidated Statements of Cash Flows                                       25
Notes to Financial Statements                                               26





                                       19
<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, 1999 and 1998 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,   1999.   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  generally   accepted  auditing
standards.  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,  1999 and 1998 and the results of their
operations  and their cash flows for each of the years in the three year  period
ended  December  31,  1999 in  conformity  with  generally  accepted  accounting
principles.





/s/ Cherry, Bekaert, & Holland, L.L.P.



Spartanburg, South Carolina
January 20, 2000





                                       20
<PAGE>

                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
                           Consolidated Balance Sheets
                           December 31, 1999 and 1998
<TABLE>
<CAPTION>
                                                                                            1999                           1998
                                                                                            ----                           ----
          Assets

<S>                                                                                     <C>                            <C>
Cash and due from banks .............................................................   $    977,503                   $    870,340
Interest-bearing deposits ...........................................................         12,308                      1,535,000
Federal funds sold ..................................................................      2,850,000                      2,815,000
Securities available for sale (cost basis of $10,286,375 and
    $10,227,837, respectively) (Note 3) .............................................      9,971,830                     10,210,262
Securities held for investment (market value of $345,176
    and $382,728, respectively) (Note 3) ............................................        375,000                        375,000
Loans (Note 4) ......................................................................     57,001,443                     35,859,212
Less: allowance for loan losses (Note 4) ............................................       (800,000)                      (575,000)
       net deferred loan fees (Note 4) ..............................................        (57,178)                       (12,950)
                                                                                        ------------                   ------------
    Net loans .......................................................................     56,144,265                     35,271,262

Premises and equipment, net (Note 5) ................................................      2,863,431                      2,894,116
Other assets ........................................................................      1,866,666                        501,008
                                                                                        ------------                   ------------
                                                                                        $ 75,061,003                   $ 54,471,988
                                                                                        ============                   ============
          Liabilities and Stockholders' Equity

Deposits (Note 6)
    Noninterest-bearing demand ......................................................   $  3,389,227                   $  3,213,126
    Interest-bearing demand and savings .............................................     17,323,385                     13,406,458
    Time deposits ...................................................................     38,002,706                     25,327,516
                                                                                        ------------                   ------------
          Total deposits ............................................................     58,715,318                     41,947,100

Retail repurchase agreements ........................................................      1,723,164                      1,326,245
Other borrowed funds (Note 7) .......................................................      2,500,000                              -
Other accrued expenses and liabilities ..............................................      1,213,189                        633,808
                                                                                        ------------                   ------------
          Total liabilities .........................................................     64,151,671                     43,907,153
                                                                                        ------------                   ------------
Stockholders' equity (Notes 8,11 and 13)
    Common stock no par value; authorized 20,000,000
       shares; issued and outstanding 917,180 and 915,759,
       respectively .................................................................              -                              -
    Paid-in capital .................................................................     11,090,139                     11,066,532
    Accumulated earnings (deficit) ..................................................         14,211                       (490,801)
    Accumulated other comprehensive (loss) ..........................................       (195,018)                       (10,896)
                                                                                        ------------                   ------------
           Stockholders' equity .....................................................     10,909,332                     10,564,835
Commitments (Notes 4 and 10) ........................................................              -                              -
                                                                                        ------------                   ------------
                                                                                        $ 75,061,003                   $ 54,471,988
                                                                                        ============                   ============
</TABLE>

See accompanying notes to consolidated financial statements.




                                       21
<PAGE>


                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
                      Consolidated Statements of Operations
                  Years ended December 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>
                                                                                    1999                1998                1997
                                                                                    ----                ----                ----
Interest income
<S>                                                                            <C>                  <C>                 <C>
    Loans ............................................................         $ 4,172,306          $ 2,879,498         $ 1,448,139
    Federal funds sold ...............................................             195,316              253,361             147,918
    Securities
       U.S. Government and agency obligations ........................             581,440              435,381             384,072
       State and local obligations ...................................              25,975               24,064              13,028
       Equity securities .............................................              11,392                5,437                   -
     Deposits with banks .............................................              18,913               76,737                   -
                                                                               -----------          -----------         -----------
          Total interest income ......................................           5,005,342            3,674,478           1,993,157
                                                                               -----------          -----------         -----------

Interest expense
    Deposits
       Time ..........................................................           1,694,408            1,405,026             653,115
       Interest-bearing demand and savings ...........................             709,482              503,593             278,728
    Other ............................................................              88,533               68,394              47,814
                                                                               -----------          -----------         -----------
            Total interest expense ...................................           2,492,423            1,977,013             979,657
                                                                               -----------          -----------         -----------

           Net interest income .......................................           2,512,919            1,697,465           1,013,500

Provision for loan losses (Note 4) ...................................             225,270              227,507             252,840
                                                                               -----------          -----------         -----------
           Net interest income after provision for loan losses .......           2,287,649            1,469,958             760,660
                                                                               -----------          -----------         -----------
 Non-interest income
    Service charges, fees, and commissions ...........................             174,909              130,743              34,478
    Other ............................................................              64,717               43,888              16,957
                                                                               -----------          -----------         -----------
           Total other operating income ..............................             239,626              174,631              51,435
                                                                               -----------          -----------         -----------

Non-interest expenses
    Salaries and employee benefits ...................................           1,119,603              906,719             684,774
    Occupancy and equipment ..........................................             350,617              303,564             228,302
    Other ............................................................             550,864              301,926             226,773
                                                                               -----------          -----------         -----------
           Total other operating expenses ............................           2,021,084            1,512,209           1,139,849
                                                                               -----------          -----------         -----------

           Income before income taxes ................................             506,191              132,380            (327,754)

Current income tax expense (Note 9) ..................................             203,479               28,350                   -
Deferred income tax benefit ..........................................            (202,300)                   -                   -
                                                                               -----------          -----------         -----------

           Net income ................................................         $   505,012          $   104,030         $  (327,754)
                                                                               ===========          ===========         ===========

Earnings per common share (Notes 2, 15) ..............................         $      0.55          $      0.15         $     (0.48)
                                                                               ===========          ===========         ===========
Diluted earnings per common share (Notes 2, 15) ......................         $      0.54          $      0.15         $     (0.48)
                                                                               ===========          ===========         ===========
</TABLE>

See accompanying notes to consolidated financial statements.



                                       22
<PAGE>


                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
           Consolidated Statements of Changes in Stockholders' Equity
                  Years ended December 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>
                                                  Common                                              Accumulated
                                                 Stock in                         Accumulated           Other              Total
                                                 Number of           Paid-In        Earnings         Comprehensive     Stockholders'
                                                  Shares             Capital       (Deficit)         Income (Loss)         Equity
                                                  ------             -------       ---------         -------------         ------
<S>                                             <C>           <C>                <C>                <C>                <C>
 Balance at
    December 31, 1996 ...............           676,584       $  7,267,045       $   (267,077)      $      3,897       $  7,003,865
       Exercised
           stock options                            200              2,200                  -                  -              2,200
      Comprehensive
           income:

       Net loss                                                          -           (327,754)                 -
       Net change in
       unrealized gain
       on securities
       available for
       sale, net of tax
       of $2,344                                      -                  -                  -                (73)
      Comprehensive
       Income                                         -                  -                  -                  -           (327,827)
                                                -------       ------------       ------------       ------------       ------------

Balance at
    December 31, 1997                           676,784          7,269,245           (594,831)             3,824          6,678,238
       Stock proceeds                           237,971          3,781,349                  -                  -          3,781,349
       Stock in lieu of
           director fee                           1,004             15,938                  -                  -             15,938
      Comprehensive
           income:
       Net income                                     -                  -            104,030                  -
       Net change in
       unrealized gain
       on securities
       available for
       sale, net of tax
       of ($6,678)...................                 -                  -                  -            (14,720)
      Comprehensive
       Income                                         -                  -                  -                  -             89,310
                                                -------       ------------       ------------       ------------       ------------

Balance at
    December 31, 1998                           915,759         11,066,532           (490,801)           (10,896)        10,564,835
</TABLE>



See accompanying notes to consolidated financial statements.

                                       23
<PAGE>

                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
           Consolidated Statements of Changes in Stockholders' Equity
             Years ended December 31, 1999, 1998 and 1997-Continued

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

<S>                                                 <C>           <C>               <C>               <C>                <C>
    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
                                                    =======       ===========       ===========       ===========        ===========
</TABLE>





















See accompanying notes to consolidated financial statements.



                                       24
<PAGE>

                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
                      Consolidated Statements of Cash Flows
                  Years ended December 31, 1999, 1998 and 1997

<TABLE>
<CAPTION>
                                                                                      1999               1998                1997
                                                                                      ----               ----                ----
<S>                                                                            <C>                 <C>                 <C>
Cash flows from operating activities
     Net income (loss) .................................................       $    505,012        $    104,030        $   (327,754)
     Adjustments to reconcile net income (loss) to net cash
        provided by operating activities
          Depreciation .................................................            172,027             164,006             112,089
          Provision for loan losses ....................................            225,270             227,507             252,840
          Loss on sale of other real estate owned ......................             36,603                   -                   -
          Deferred tax asset ...........................................           (202,300)                  -                   -
          Director fees ................................................             22,423              15,938                   -
          (Accretion) amortization, net ................................            112,810               8,840                (814)
          Increase in other assets .....................................           (319,668)           (235,583)            (86,756)
          Increase (decrease) in accrued expenses
             and other liabilities .....................................            579,381             (23,549)            551,547
                                                                               ------------        ------------        ------------
          Net cash provided by operating activities ....................          1,131,558             261,189             501,152
                                                                               ------------        ------------        ------------

Cash flows from investing activities
     Purchase of securities available for sale .........................         (1,000,000)        (13,622,813)         (2,700,000)
     Purchase of securities held for investment ........................                  -                   -          (1,875,000)
     Purchases of restricted FHLB stock ................................            (58,500)           (105,000)                  -
     Proceeds from call of available for sale securities ...............          1,000,000           7,699,769             500,000
     Proceeds from maturities held to maturity securities ..............                  -           2,000,424           4,501,763
     Increase in cash surrender value of life insurance ................           (846,204)                  -                   -
     Origination of loans, net of principal collected ..................        (21,169,141)        (14,610,854)        (16,040,137)
     Purchase of other real estate owned ...............................           (343,086)                  -                   -
     Proceeds from sale of other real estate owned .....................            379,865                   -                   -
     Purchases of premises and equipment ...............................           (141,342)            (24,096)         (1,521,345)
                                                                               ------------        ------------        ------------
            Net cash used in investing activities ......................        (22,178,408)        (18,662,570)        (17,134,719)
                                                                               ------------        ------------        ------------

Cash flows from financing activities
     Net increase in deposits
                                                                                 16,768,218          15,564,936          16,479,127
     Proceeds from exercise of stock options
                                                                                      1,184                   -               2,200
     Proceeds from stock sale ..........................................                  -           3,781,349                   -
     Proceeds from other borrowings ....................................          2,500,000                   -                   -
     Net increase in retail repurchase agreements ......................            396,919              69,628             874,268
                                                                               ------------        ------------        ------------
             Net cash provided by financing activities .................         19,666,321          19,415,913          17,355,595
                                                                               ------------        ------------        ------------

Net increase (decrease) in cash and cash equivalents ...................         (1,380,529)          1,014,532             722,028

Cash and cash equivalents at beginning of year .........................          5,220,340           4,205,808           3,483,780
                                                                               ------------        ------------        ------------

Cash and cash equivalents at end of year ...............................       $  3,839,811        $  5,220,340        $  4,205,808
                                                                               ============        ============        ============

Supplemental disclosure of cash flow information
     Cash paid during the year for interest ............................       $  1,797,793        $  1,811,917        $    839,602
                                                                               ============        ============        ============
     Cash paid (received) during the year for income taxes .............       $     (7,138)       $     28,350        $          -
                                                                               ============        ============        ===========
</TABLE>

See accompanying notes to consolidated financial statements.



                                       25
<PAGE>

                    FIRST SOUTH BANCORP, INC. AND SUBSIDIARY
                 Notes to the Consolidated Financial Statements
                           December 31, 1999 and 1998


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, 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.  The Bank's primary business location is
in Spartanburg, South Carolina.


Note 2 - Summary of significant accounting policies

The  following is a  description  of the  significant  accounting  and reporting
policies  the  Company   follows  in  preparing  and  presenting  its  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  generally  accepted  accounting  principles  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:

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

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

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

     The  Bank  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 Bank 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.



                                       26
<PAGE>

(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.

     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 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.



                                       27
<PAGE>

(h)  Cash and cash equivalents

     Cash and cash  equivalents  include  cash and due from banks in addition to
     federal funds sold and interest-bearing deposits.

(i)  Earnings (loss) per common share

     Earnings (loss) per common share is computed based on the weighted  average
     number of common shares  outstanding.  Diluted  earnings  (loss) per common
     share includes the dilutive  effect of outstanding  stock options.  For the
     year ended December 31, 1997, potentially dilutive common shares applicable
     to outstanding stock options were antidilutive and were not included in the
     computation.

(j)  Fair value of financial instruments

     SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"("SFAS
     107")  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  increase  or  decrease  in value of  financial
     instruments held by the Bank since purchase, origination or issuance.

     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  investments  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.

     Deposits.  The fair  value of  noninterest-bearing  demand  deposits,  NOW,
     savings and money  market  deposits is the amount  payable on demand at the
     reporting  date. The fair value of time deposits with remaining  maturities
     of more than one year is estimated using a discounted cash flow calculation
     that  applies  interest  rates  currently  offered for  deposits of similar
     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.



                                       28
<PAGE>

(k)  Recent accounting pronouncements

     In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
     Instruments and Hedging  Activities,"  effective for fiscal years beginning
     after June 15, 1999. In June 1999,  the FASB deferred the effective date of
     the Statement to fiscal years beginning after June 15, 2000. This Statement
     establishes  accounting and reporting standards for derivative  instruments
     and hedging activities,  including certain derivative  instruments embedded
     in other  contracts,  and requires that an entity recognize all derivatives
     as assets or  liabilities  in the balance  sheet and  measure  them at fair
     value.  Management  is  currently  evaluating  the impact of adopting  this
     Statement on the consolidated financial statements, but does not anticipate
     it will have a material impact.

(l)  Financial statement reclassification

     For comparability,  the 1998 figures were reclassified where appropriate to
     conform with the 1999 financial statement presentation.

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, 1999
<S>                                                       <C>                <C>                    <C>                  <C>
   U.S. Government agency
      obligations ..............................          $10,000,000        $           -          $   300,849          $ 9,699,151
   State and local obligations .................              122,875                    -               13,696              109,179
   Restricted FHLB stock .......................              163,500                    -                    -              163,500
                                                          -----------          -----------          -----------          -----------
       Total securities
           available for sale ..................          $10,286,375        $           -          $   314,545          $ 9,971,830
                                                          ===========          ===========          ===========          ===========

December 31, 1998
   U.S. Government agency
      obligations ..............................          $10,000,000          $    22,562          $    42,717          $ 9,979,845
   State and local obligations .................              122,837                2,580                    -              125,417
   Restricted FHLB stock .......................              105,000                    -                    -              105,000
                                                          -----------          -----------          -----------          -----------
       Total securities
           available for sale ..................          $10,227,837          $    25,142          $    42,717          $10,210,262
                                                          ===========          ===========          ===========          ===========
</TABLE>

There were no sales of securities available for sale during 1999, 1998 and 1997.

Held for investment

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



                                       29
<PAGE>

<TABLE>
<CAPTION>
                                                                                        Gross              Gross           Estimated
                                                                  Amortized          Unrealized         Unrealized           Fair
                                                                    Cost                Gains             Losses             Value
                                                                    ----                -----             ------             -----
<S>                                                                <C>               <C>                 <C>                <C>
December 31, 1999
   State and local obligations .........................           $375,000          $       -           $ 29,824           $345,176
                                                                   --------          --------            --------           --------
       Total securities
            held for
            investment .................................           $375,000          $       -           $ 29,824           $345,176
                                                                   ========          ========            ========           ========

December 31, 1998
   State and local obligations .........................           $375,000           $  7,728           $      -           $382,728
                                                                   --------           --------           --------           --------
       Total securities
            held for
            investment .................................           $375,000           $  7,728           $      -           $382,728
                                                                   ========           ========           ========           ========
</TABLE>

There were no sales of securities held for investment in 1999, 1998 and 1997.

The scheduled  maturities of debt  securities  held for investment and available
for sale at December 31, 1999 were as follows:


<TABLE>
<CAPTION>
                                                            Available for Sale                           Held for Investment
                                                            ------------------                           -------------------
                                                                              Estimated                                  Estimated
                                                        Amortized               Fair                Amortized               Fair
                                                          Costs                Value                  Costs                Value
                                                          -----                -----                  -----                -----

<S>                                                  <C>                  <C>                     <C>                     <C>
Due in one year or less ....................         $           -        $            -          $          -            $        -
Due from one to five years .................             9,000,000             8,732,275                     -                     -
Due from five to 10 years ..................             1,000,000               966,875                     -                     -
Due after ten years ........................               122,875               109,180               375,000               345,176
                                                       -----------           -----------           -----------           -----------

                                                       $10,122,875           $ 9,808,330           $   375,000           $   345,176
                                                       ===========           ===========           ===========           ===========
</TABLE>

At  December  31,  1999,  securities  with a  carrying  value  of  approximately
$6,000,000  were pledged to secure other borrowed  funds,  public funds,  retail
repurchase agreements and Treasury, tax and loan deposits.


Note 4 - Loans and allowance for loan losses




                                       30
<PAGE>



Loans at December 31, 1999 and 1998 are summarized as follows

                                                      1999               1998
                                                      ----               ----
 Construction and land development .........     $  7,639,096      $  3,038,010
 1-4 Family residential properties .........       11,864,014         8,752,032
 Multifamily residential properties ........          733,966           763,021
 Nonfarm nonresidential properties .........       18,452,839        12,845,101
 Other real estate loans ...................          574,620           424,005
 Commercial and industrial .................       16,579,460         9,274,030
 Consumer ..................................          600,794           763,013
 Other .....................................          556,654                 -
                                                 ------------      ------------
  Total loans .............................        57,001,443        35,859,212
 Less:  Allowance for loan losses ..........         (800,000)         (575,000)
          Net deferred loan fees ...........          (57,178)          (12,950)
                                                 ------------      ------------

                                                 $ 56,144,265      $ 35,271,262
                                                 ============      ============


The  activity  in the  allowance  for loan  losses  for  1999,  1998 and 1997 is
summarized as follows:

                                             1999          1998           1997
                                             ----          ----           ----
Balance at beginning of year .........    $ 575,000     $ 350,000     $ 100,000
Provision charged to operations ......      225,270       227,507       252,840
Loan charge-offs .....................         (400)       (2,507)       (2,840)
 Loan recoveries .....................          130             -             -
                                          ---------     ---------     ---------

     Balance at end of year ..........    $ 800,000     $ 575,000     $ 350,000
                                          =========     =========     =========

At December 31, 1999 and 1998,  nonaccrual  loans amounted to $702,350 and $-0-,
respectively. There were no impaired loans at December 31, 1999 and 1998.

At December 31, 1999, the Bank had loans outstanding to officers, directors, and
their related interests of $5,628,734.  During 1999,  directors,  officers,  and
their related interests borrowed $3,802,866,  and repaid $1,899,512. At December
31,  1998,  the Bank had loans  outstanding  to officers,  directors,  and their
related interests of $3,725,380.  During 1998,  directors,  officers,  and their
related interests borrowed $4,768,597 and repaid $3,278,830.

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, 1999 and 1998,  preapproved  but unused  lines of credit for loans
totaled approximately $13,585,000 and $8,341,000, respectively. In addition, the
Bank had issued standby letters of credit amounting to approximately $427,500 at
December 31, 1999. These  commitments  represent no more than the normal lending
risk that the Bank commits to its borrowers. If these commitments are drawn, the
Bank 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 Bank grants  primarily  commercial,  real estate,  and installment  loans to
customers  throughout its market area,  which consists  primarily of Spartanburg
County.  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.



                                       31
<PAGE>

Note 5 - Premises and equipment

Premises and equipment at December 31, 1999 and 1998 are summarized as follows:

                                                     1999               1998
                                                     ----               ----

Land .....................................       $   431,412        $   431,412
Building .................................         2,047,979          2,047,979
Leasehold improvements ...................            93,590             93,590
Furniture and equipment ..................           670,603            617,393
Construction in progress .................            88,132                  -
                                                 -----------        -----------
                                                   3,331,716          3,190,374
Less accumulated depreciation ............          (468,285)          (296,258)
                                                 -----------        -----------
Premises and equipment, net ..............       $ 2,863,431        $ 2,894,116
                                                 ===========        ===========

Depreciation  expense  for the  years  ended  1999,  1998 and 1997  amounted  to
$172,027, $164,006 and $112,089, respectively.


Note 6 - Deposits

A summary of deposit accounts at December 31, 1999 and 1998 follows:

                                                     1999               1998
                                                     ----               ----
Demand:
    Noninterest-bearing ................         $ 3,389,227         $ 3,213,126
    Interest bearing ...................          15,395,626          12,639,183
Savings ................................           1,927,759             767,275
Time, $100,000 or more .................          10,930,849           6,841,137
Other time .............................          27,071,857          18,486,379
                                                 -----------         -----------
                                                 $58,715,318         $41,947,100
                                                 ===========         ===========

At December 31, 1999, the scheduled maturities of time deposits are as follows:

                        2000              $28,863,009
                        2001                8,011,973
                        2002                1,102,721
                        2003                   25,003
                        2004                        -
                        Thereafter                  -
                                          -----------

                                          $38,002,706
                                          ===========

Note 7 - Other borrowed funds

At December 31,  1999,  the Bank had an advance of  $2,500,000  from the Federal
Home Loan Bank (FHLB).  The  borrowing  carries an interest  rate of the FHLB of
Atlanta  overnight  deposit rate plus .25%  (4.55%) at December  31,  1999.  The
borrowing  matures November 20,2000 and is secured by an U.S.  government agency
security.

At  December  31,  1999  and  1998,  the  Bank had  $5,100,000  and  $2,000,000,
respectively, in unused lines of credit to purchase federal funds from banks.


                                       32
<PAGE>

Note 8 - Regulatory capital requirements

The  Corporation  (on a consolidated  basis) 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 Corporation and the Bank's  financial
statements.  Under capital adequacy guidelines and the regulatory  framework for
prompt  corrective  action,  the  Corporation  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 Corporation 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,
1999 and  1998,  that the  Corporation  and the  Bank met all  capital  adequacy
requirements to which it is subject.

As of December 31, 1999, 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
Corporation  and the Bank's actual capital amounts and ratios as of December 31,
1999 and 1998 are also presented in the table.

<TABLE>
<CAPTION>
                                                                                                                To Be Well
                                                                                                             Capitalized Under
                                                                                   For Capital                Prompt Corrective
                                                                                Adequacy Purposes            Action Provisions
                                                                                -----------------            -----------------
                                                        Actual                        Minimum                      Minimum
                                                        ------                        -------                      -------
                                                 Amount         Ratio         Amount           Ratio         Amount           Ratio
                                                 ------         -----         ------           -----         ------           -----
December 31, 1999
   Total Capital
<S>                                          <C>                 <C>        <C>                 <C>       <C>                 <C>
     (To Risk Weighted
      Assets) .......................        $11,861,000         19.6%      $ 4,844,000         8.0%      $ 6,055,000         10.0%
   Tier I Capital
     (To Risk Weighted
      Assets) .......................        $11,104,000         18.3%        2,422,000         4.0%        3,633,000          6.0%
   Tier I Capital
    (To Average Assets) .............        $11,104,000         14.9%        2,977,000         4.0%        3,721,000          5.0%


December 31, 1998
   Total Capital
     (To Risk Weighted
      Assets) .......................        $11,084,000         27.3%      $ 3,245,000         8.0%      $ 4,056,000         10.0%
    Tier I Capital
     (To Risk Weighted
      Assets) .......................        $10,576,000         26.1%        1,623,000         4.0%        2,434,000          6.0%
   Tier I Capital
    (To Average Assets) .............        $10,576,000         19.6%        2,156,000         4.0%        2,695,000          5.0%
</TABLE>


                                       33
<PAGE>

Note 9 - Income taxes

As a result of its  operating  losses,  the Bank did not have either  federal or
state taxable  income in 1997 and,  therefore,  there was no current  income tax
expense.

The reasons for the  difference  between the statutory  federal income tax rates
and the effective tax rates are summarized as follows for:
                                                                 Years ended
                                                                December 31
                                                            1999          1998
                                                         ----------    -------

  Statutory rates ....................................        34.0%       34.0%
  Increase (decrease) resulting from:
    State taxes, net of federal benefit ..............         3.1%        2.3%
    Effect of tax exempt interest and dividends ......        (1.4%)      (6.1%)
    (Decrease) increase in valuation allowance .......       (36.7%)       6.0%
    Other, net .......................................         1.0%      (14.8%)
                                                             -----       -----

                                                                 -        21.4%
                                                             =====        ====


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

                                                        1999              1998
                                                        ----              ----
Deferred tax assets
   Allowance for loan losses .................       $ 260,000        $ 172,000
   Loan fee deferral .........................          20,000            5,000
   Premium on loan participation .............          19,000           38,000
   Unrealized loss on securities
       available for sale ....................         120,000            3,000
   Start-up costs amortization ...............          47,000           75,000
   Other .....................................           2,000                -
                                                     ---------        ---------
       Gross deferred tax assets .............         468,000          293,000
   Less valuation allowance ..................        (117,700)        (274,000)
                                                     ---------        ---------
       Net deferred tax assets ...............         350,300           19,000

Deferred tax liabilities .....................         (28,000)         (19,000)
                                                     ---------        ---------

       Net ...................................       $ 322,300        $       -
                                                     =========        =========


Note 10 - Operating leases

The Bank leases the land and building for its branches under  operating  leases.
Future minimum lease payments at December 31, 1999, are as follows:

                  2000                                     $ 74,681
                  2001                                       84,419
                  2002                                       85,956
                  2003                                       87,494
                  2004 and thereafter                        79,613
                                                         ----------

                                                           $412,163

Total lease expense was $32,400 for 1999, 1998 and 1997.


                                       34
<PAGE>

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.

At December 31, 1999, the Bank's retained earnings  available for the payment of
dividends was $20,211.

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
$37,188, $28,091, and $26,913 in 1999, 1998 and 1997, respectively.

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.  At  December  31,  1999,  $4,562 in accrued
benefit expense was included in other liabilities.


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 Statement of
Financial  Accounting  Standards  (SFAS) No. 123,  "Accounting  for  Stock-Based
Compensation." As permitted by SFAS No. 123, the Company has elected to continue
using the measurement  method  prescribed in Accounting  Principles  Board (APB)
Opinion  No. 25 and,  accordingly,  SFAS 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, 1999, 1998 and 1997:



                                       35
<PAGE>

<TABLE>
<CAPTION>
                                                                     1999                       1998                        1997
                                                                     ----                       ----                        ----
                                                                 Weighted Avg.               Weighted Avg.             Weighted Avg.
                                                   Options       Exercise Price  Options     Exercise Price  Options  Exercise Price
                                                   -------       --------------  -------     --------------  -------  --------------

<S>                                                 <C>          <C>            <C>          <C>            <C>         <C>
Outstanding-
   Beginning of period ....................         37,992       $   12.10      28,779       $   11.16      29,379      $   11.20
   Granted ................................         20,208           16.89       9,213           15.04         100          13.50
   Exercised ..............................           (100)          11.00           -            -           (200)         11.00
   Forfeited ..............................              -            -              -            -           (500)         11.00
                                                   -------                     -------                     -------

Outstanding-End of
   Year ...................................         58,100       $   13.76      37,992       $   12.10      28,779      $   11.16
                                                   =======                     =======                     =======
 Exercisable-End of Year ..................         30,720       $   11.70      18,290       $   11.12       9,145      $   11.12
                                                   =======                     =======                     =======
 Weighted average fair
   value of options granted
   during the year ........................        $  8.43                     $  6.54                     $  5.61
                                                   =======                     =======                     =======
</TABLE>

Exercise prices for options  outstanding as of December 31, 1999 and 1998 ranged
from  $11 to $17.  The  weighted  average  remaining  contractual  life of those
options is approximately 8 years at December 31, 1999 and 1998.

Because the Company had adopted the disclosure  only provisions of SFAS No. 123,
no  compensation  cost has been  recognized  for the  stock  options  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
SFAS No. 123, the  Company's net earnings  (loss) and earnings  (loss) per share
would have increased to the pro forma amounts indicated below:

<TABLE>
<CAPTION>
                                                                                1999                1998               1997
                                                                                ----                ----               ----
<S>                                                                          <C>                <C>                <C>
Net income (loss) - as reported .......................................      $ 505,012          $ 104,030          $(327,754)
Net income (loss) - pro forma .........................................        480,678             73,278           (361,342)
Earnings (loss) per common share - as reported ........................            .55                .15               (.48)
Earnings (loss) per common share - pro forma ..........................            .53                .10               (.53)
Diluted earnings (loss) per common share - as reported ................            .54                .15               (.48)
Diluted earnings (loss) per common share - pro forma ..................            .51                .10               (.53)
</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 1999,  1998 and  1997;  dividend  yield of 0%,
expected  volatility  of 20% for  1999 and  1998,  and 12% for  1997,  risk-free
interest  rates of 6.25% in 1999,  4.65% in 1998 and 5.70% in 1997, and expected
lives of 10 years for the options.





                                       36
<PAGE>

Note 14 - Fair value of financial instruments

The estimated fair value of financial instruments are as follows:

<TABLE>
<CAPTION>
                                                                               1999                                 1998
                                                                               ----                                 ----
                                                                  Carrying           Estimated             Carrying       Estimated
                                                                   Amount            Fair Value             Amount        Fair Value
                                                                   ------            ----------             ------        ----------
                                                                        (in thousands)                          (in thousands)
<S>                                                                 <C>                 <C>                <C>                <C>
Financial assets
   Cash and cash equivalents ...........................            $ 3,840              3,840              5,220              5,220
   Securities
      Available for sale ...............................              9,972              9,972             10,210             10,210
      Held for investment ..............................                375                345                375                383
   Loans ...............................................             56,144             55,943             35,271             35,271

Financial liabilities
   Deposits ............................................             58,715             58,715             41,947             41,947
   Retail repurchase agreements ........................              1,723              1,723              1,326              1,326
   Other borrowed funds ................................              2,500              2,500                  -                  -
</TABLE>

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, 1999                                                             (Numerator)            (Denominator)          Amount
                                                                              -----------            -------------          ------
<S>                                                                            <C>                      <C>                   <C>
Earnings per common share:
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
                                                                               ========                 =======               =====
<CAPTION>
                                                                                                                             Per
                                                                                Income                  Shares              Share
December 31, 1998                                                             (Numerator)            (Denominator)          Amount
                                                                              -----------            -------------          ------
Earnings per common share:
Income available to common
    stockholders ...............................................                $104,030                 705,479             $  .15
Effect of dilutive securities
    Stock options ..............................................                       -                   9,064                  -
                                                                                --------                 -------             ------
Diluted EPS:
Income available to common
    stockholders + assumed
    conversions ................................................                $104,030                 714,543             $   .15
                                                                                ========                 =======             =======
</TABLE>

                                       37
<PAGE>

Note 16 - Condensed financial statements of parent company

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

Balance Sheet

                                                                    December 31,
                                                                        1999
                                                                        ----
Assets
    Investment in common stock of First South Bank ...........       $10,909,332
                                                                     -----------
       Total assets ..........................................       $10,909,332
                                                                     ===========
Equity
    Stockholders' equity .....................................       $10,909,332
                                                                     -----------
       Total stockholders' equity ............................       $10,909,332
                                                                     ===========


Income Statement

                                                                     Year ended
                                                                    December 31,
                                                                        1999
                                                                        ----
Income
       Operating income ........................................      $       -

Expense
    Other expenses - directors' fee ............................          6,000
                                                                      ---------

Loss before equity in undistributed net income
    of First South Bank ........................................         (6,000)

Equity in undistributed net income of First South Bank .........        511,012
                                                                      ---------
                                                                      $ 505,012
                                                                      =========

The parent company had no cash  transactions  during 1999.  The directors'  fees
were paid with Company stock in lieu of cash.

Note 17 - Noncash transaction

The Company  foreclosed on an asset during the year ended  December 31, 1999 and
transferred the loan and accrued  interest  balance at the time of sale to other
real estate owned in the amount of $73,382.

                                       38
<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 2000
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 2000 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 2000 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 2000 Annual Meeting of Shareholders is incorporated herein by
reference.



                                       39
<PAGE>

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

(a)      Description of Exhibits.

Exhibit No.                Description

3.1                       Articles of Incorporation of Registrant*
3.2                       Bylaws of Registrant*
10.1                      First South Bank Stock Option Plan
10.2                      Form of Option Agreements with Barry L. Slider,  dated
                          as  of  December  31,  1998,  December  31,  1997  and
                          December 31, 1996.
10.3                      Form of Salary  Continuation  Agreements with Barry L.
                          Slider and V. Lewis Shuler dated November 19, 1999.
21                        Subsidiaries of Registrant
27                        Financial Data Schedule
---------------
*Incorporated by reference to Form 8-A filed November 12, 1999

(b)      Reports on Form 8.K.

         No  reports  on Form 8-K were  filed by the  registrant  in the  fourth
quarter of 1999.




                                       40
<PAGE>

                           FORWARD-LOOKING STATEMENTS


         This document contains  forward-looking  statements with respect to the
financial condition,  results of operations, and business of the Company and the
Bank. These forward-looking  statements involve certain risks and uncertainties.
Factors  that  may  cause  actual  results  to  differ   materially  from  those
contemplated  by such  forward-looking  statements  include,  among others,  the
following possibilities: (1) The Company and its subsidiary bank may not be able
to operate  profitably;  (2)  Competitive  pressure in the banking  industry may
increase  significantly;  (3) Costs or difficulties  related to operation of the
Bank may be greater than expected;  (4) Changes in the interest rate environment
may reduce  margins;  (5) General  economic  conditions,  either  nationally  or
regionally,  may be less  favorable  than  expected,  resulting  in, among other
things, a deterioration  in credit demand and quality;  (6) Changes may occur in
the regulatory environment;  (7) Changes may occur in business conditions and/or
inflation; and (8) Changes may occur in the securities markets.  Forward-looking
statements include statements concerning plans,  objectives,  goals, strategies,
future events or performance  and underlying  assumptions  and other  statements
which are other  than  statements  of  historical  facts.  Such  forward-looking
statements  may be  identified,  without  limitation,  by the  use of the  words
"anticipates,"   "estimates,"   "expects,"   "intends,"   "plans,"   "predicts,"
"projects," and similar  expressions.  The Company's  expectations,  beliefs and
projections  are expressed in good faith and are believed by the Company to have
a reasonable basis,  including without limitation,  management's  examination of
historical  operating trends,  data contained in the Company's records and other
data  available  from  third  parties,  but  there  can  be  no  assurance  that
management's expectations,  beliefs or projections will result or be achieved or
accomplished.

















                                       41

<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.


                                s/Barry L. Slider
March 28, 2000              By:-------------------------------------------------
                                 Barry L. Slider
                                 President and Chief Executive Officer


                                s/V. Lewis Shuler
                           By:--------------------------------------------------
                                 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>
--------------------------               Director                                           March __, 2000
Richard H. Brooks

s/Harold E. Fleming, M.D.
--------------------------               Director                                           March 28, 2000
Harold E. Fleming, M.D.

s/Joel C. Griffin
--------------------------               Director                                           March 28, 2000
Joel C. Griffin

s/Roger A. F. Habisreutinger
--------------------------               Chairman, Director                                 March 28, 2000
Roger A. F. Habisreutinger

s/Ashley F. Houser
--------------------------               Director                                           March 28, 2000
Ashley F. Houser

--------------------------               Director                                           March __, 2000
Herman E. Ratchford

--------------------------               Director                                           March __, 2000
Chandrakant V. Shanbhag

s/Barry L. Slider
--------------------------               President, Chief Executive Officer, Director       March 28, 2000
Barry L. Slider

s/David G. White
--------------------------               Director                                           March 28, 2000
David G. White
</TABLE>