----

| First South Bancorp |
|---------------------|

----

| Letter to Stockholders                                                               | 2      |
|--------------------------------------------------------------------------------------|--------|
|                                                                                 |   |
| Selected Consolidated Financial Information and Other Data                           | 3      |
|                                                                                 |   |
| Management's Discussion and Analysis of Financial Condition and Results of Operation | 4      |
|                                                                                 |   |
| Report of Independent Registered Public Accounting Firm                              | 17     |
|                                                                                 |   |
| Consolidated Statements of Financial Condition                                       | 18     |
|                                                                                 |   |
| Consolidated Statements of Operations                                                | 19     |
|                                                                                 |   |
| Consolidated Statements of Changes in Stockholders' Equity                           | 20     |
|                                                                                 |   |
| Consolidated Statements of Cash Flows                                                | 21     |
|                                                                                 |   |
| Notes to Consolidated Financial Statements                                           | 22     |
|                                                                                 |   |
| Board of Directors                                                                   | 41     |
|                                                                                 |   |
| Executive Officers                                                                   | 41     |
|                                                                                 |   |
| Area Executives and Subsidiary Executives                                            | 41     |
|                                                                                 |   |
| City Executives                                                                      | 41     |
|                                                                                 |   |
| First South Bank Office Locations                                                    | 42     |
|                                                                                 |   |
| Stockholder Information                                                              | 43     |
|                                                                                 |   |
| Comparative Stock Performance Graph                                                  | 44     |

----

|   | Sincerely,              |
|--------|-------------------------|
|   |                    |
|   | /s/ Tom Vann            |
|   | Tom Vann                |
|   | President and           |
|   | Chief Executive Officer |

----

|                                     |   | At or For the Years Ended December 31,   |    |
|------------------------------------------|--------|-----------------------------------------------------------------------------|---------|
|                                     |   | 2010                                                                        |    |   | 2009 |   |   | 2008 |   |   | 2007 |   |   | 2006 |   |
|                                     |   | (dollars in thousands, except per share data) |    |
| Selected Financial Condition Data        |   |                                                                        |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Total assets                             |   | $                                                                           | 797,246 |   |   | $ | 829,891 |   |   | $ | 875,855 |   |   | $ | 909,288 |   |   | $ | 910,548 |   |
| Loans receivable, net                    |   |                                                                        | 606,074 |   |   |   | 658,656 |   |   |   | 744,731 |   |   |   | 765,083 |   |   |   | 761,437 |   |
| Cash and investments                     |   |                                                                        | 44,434  |   |   |   | 30,045 |   |   |   | 63,284 |   |   |   | 73,094 |   |   |   | 82,258 |   |
| Mortgage-backed securities               |   |                                                                        | 98,883  |   |   |   | 97,239 |   |   |   | 32,827 |   |   |   | 39,120 |   |   |   | 36,729 |   |
| Deposits                                 |   |                                                                        | 689,465 |   |   |   | 688,511 |   |   |   | 716,427 |   |   |   | 761,370 |   |   |   | 800,188 |   |
| Borrowings                               |   |                                                                        | 21,813  |   |   |   | 47,690 |   |   |   | 62,868 |   |   |   | 52,377 |   |   |   | 21,450 |   |
| Stockholders' equity                     |   |                                                                        | 79,513  |   |   |   | 86,214 |   |   |   | 87,821 |   |   |   | 86,035 |   |   |   | 78,797 |   |
|                                     |   |                                                                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Selected Operations Data                 |   |                                                                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest income                          |   | $                                                                           | 42,871  |   |   | $ | 49,060 |   |   | $ | 59,364 |   |   | $ | 70,078 |   |   | $ | 67,752 |   |
| Interest expense                         |   |                                                                        | 9,019   |   |   |   | 16,094 |   |   |   | 23,317 |   |   |   | 29,111 |   |   |   | 25,607 |   |
| Net interest income                      |   |                                                                        | 33,852  |   |   |   | 32,966 |   |   |   | 36,047 |   |   |   | 40,967 |   |   |   | 42,145 |   |
| Provision for credit losses              |   |                                                                        | 22,152  |   |   |   | 7,180 |   |   |   | 4,044 |   |   |   | 350 |   |   |   | 933 |   |
| Noninterest income                       |   |                                                                        | 10,844  |   |   |   | 10,960 |   |   |   | 10,084 |   |   |   | 10,137 |   |   |   | 9,259 |   |
| Noninterest expenses                     |   |                                                                        | 26,725  |   |   |   | 25,345 |   |   |   | 24,165 |   |   |   | 22,911 |   |   |   | 22,207 |   |
| Income (loss) before income taxes        |   |                                                                        | (4,181  | ) |   |   | 11,401 |   |   |   | 17,922 |   |   |   | 27,843 |   |   |   | 28,264 |   |
| Income tax expense (benefit)             |   |                                                                        | (1,801  | ) |   |   | 4,365 |   |   |   | 6,934 |   |   |   | 10,840 |   |   |   | 11,072 |   |
| Net income (loss)                        |   | $                                                                           | (2,380  | ) |   | $ | 7,036 |   |   | $ | 10,988 |   |   | $ | 17,003 |   |   | $ | 17,192 |   |
|                                     |   |                                                                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Per Share Data                           |   |                                                                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic earnings (loss) per share          |   | $                                                                           | (0.24   | ) |   | $ | 0.72 |   |   | $ | 1.13 |   |   | $ | 1.71 |   |   | $ | 1.77 |   |
| Diluted earnings (loss) per share        |   |                                                                        | (0.24   | ) |   |   | 0.72 |   |   |   | 1.12 |   |   |   | 1.70 |   |   |   | 1.72 |   |
| Dividends per share                      |   |                                                                        | 0.49    |   |   |   | 0.80 |   |   |   | 0.80 |   |   |   | 0.76 |   |   |   | 0.68 |   |
|                                     |   |                                                                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Average Balance Data                     |   |                                                                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Average assets                           |   | $                                                                           | 811,742 |   |   | $ | 866,504 |   |   | $ | 902,668 |   |   | $ | 907,333 |   |   | $ | 889,902 |   |
| Average earning assets                   |   |                                                                        | 738,074 |   |   |   | 800,899 |   |   |   | 839,011 |   |   |   | 853,592 |   |   |   | 834,553 |   |
| Average interest bearing liabilities     |   |                                                                        | 623,155 |   |   |   | 679,299 |   |   |   | 712,423 |   |   |   | 708,879 |   |   |   | 700,128 |   |
| Average equity                           |   |                                                                        | 86,852  |   |   |   | 88,129 |   |   |   | 87,695 |   |   |   | 83,608 |   |   |   | 73,330 |   |
|                                     |   |                                                                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Selected Financial Ratios and Other Data |   |                                                                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Performance Ratios:                      |   |                                                                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Return on average assets                 |   |                                                                        | (0.29   | ) % |   |   | 0.81 | % |   |   | 1.22 | % |   |   | 1.87 | % |   |   | 1.93 | % |
| Return on average equity                 |   |                                                                        | (2.74   | ) |   |   | 7.98 |   |   |   | 12.53 |   |   |   | 20.34 |   |   |   | 23.45 |   |
| Interest rate spread                     |   |                                                                        | 4.55    |   |   |   | 4.04 |   |   |   | 4.18 |   |   |   | 4.63 |   |   |   | 4.94 |   |
| Net interest margin                      |   |                                                                        | 4.59    |   |   |   | 4.12 |   |   |   | 4.30 |   |   |   | 4.80 |   |   |   | 5.05 |   |
| Average earning assets/average           |   |                                                                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| interest bearing liabilities             |   |                                                                        | 118.44  |   |   |   | 117.90 |   |   |   | 117.77 |   |   |   | 120.41 |   |   |   | 119.20 |   |
| Noninterest expense/average assets       |   |                                                                        | 3.29    |   |   |   | 2.92 |   |   |   | 2.68 |   |   |   | 2.53 |   |   |   | 2.50 |   |
| Efficiency ratio                         |   |                                                                        | 59.72   |   |   |   | 57.63 |   |   |   | 52.31 |   |   |   | 44.99 |   |   |   | 43.14 |   |
|                                     |   |                                                                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Quality Ratios:                          |   |                                                                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Nonperforming assets/total assets        |   |                                                                        | 6.63    | % |   |   | 2.50 | % |   |   | 2.59 | % |   |   | 1.01 | % |   |   | 0.37 | % |
| Nonperforming loans/total loans          |   |                                                                        | 6.59    |   |   |   | 1.51 |   |   |   | 1.98 |   |   |   | 0.97 |   |   |   | 0.35 |   |
| Allowance for credit losses/total loans  |   |                                                                        | 3.04    |   |   |   | 2.04 |   |   |   | 1.58 |   |   |   | 1.27 |   |   |   | 1.29 |   |
| Provision for credit losses/total loans  |   |                                                                        | 3.54    |   |   |   | 1.07 |   |   |   | 0.53 |   |   |   | 0.05 |   |   |   | 0.12 |   |
|                                     |   |                                                                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital Ratios and Other Data:           |   |                                                                        |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Equity/total assets, end of period       |   |                                                                        | 9.97    | % |   |   | 10.39 | % |   |   | 10.03 | % |   |   | 9.46 | % |   |   | 8.65 | % |
| Average equity/average assets            |   |                                                                        | 10.70   |   |   |   | 10.17 |   |   |   | 9.72 |   |   |   | 9.21 |   |   |   | 8.24 |   |
| Loans serviced for others                |   | $                                                                           | 318,218 |   |   | $ | 289,324 |   |   | $ | 255,510 |   |   | $ | 254,671 |   |   | $ | 245,633 |   |
| Full service offices                     |   |                                                                        | 28      |   |   |   | 28 |   |   |   | 28 |   |   |   | 29 |   |   |   | 26 |   |

----

----

|                               |   | Payments Due by Period |    |
|------------------------------------|--------|---------------------------------------|---------|
|                               |   |                                  |    |   | Less Than |   |   |   |   |   |   |   |   | Over |   |
| Contractual Obligations       |   | Total                                 |    |   | 1 Year |   |   | 1-3 Years |   |   | 4-5 Years |   |   | 5 Years |   |
|                               |   | (In thousands)                        |    |
| Borrowed money                     |   | $                                     | 11,503  |   |   | $ | 10,000 |   |   | $ | 1,503 |   |   | $ | - |   |   | $ | - |   |
| Junior subordinated debentures     |   |                                  | 10,310  |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | 10,310 |   |
| Lease obligations                  |   |                                  | 1,345   |   |   |   | 482 |   |   |   | 680 |   |   |   | 121 |   |   |   | 62 |   |
| Deposits                           |   |                                  | 689,465 |   |   |   | 464,486 |   |   |   | 224,618 |   |   |   | 361 |   |   |   | - |   |
| Total contractual cash obligations |   | $                                     | 712,623 |   |   | $ | 474,968 |   |   | $ | 226,801 |   |   | $ | 482 |   |   | $ | 10,372 |   |

|                                    |   | Amount of Commitment Expiration Per Period |   |
|-----------------------------------------|--------|---------------------------------------------------------------------|--------|
|                                    |   | Total                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                    |   | Amounts                                                             |   |   | Less than |   |   |   |   |   |   |   |   | Over |   |
| Other Commitments                  |   | Committed                                                           |   |   | 1 Year |   |   | 1-3 Years |   |   | 4-5 Years |   |   | 5 Years |   |
|                                    |   | (In thousands)                                                      |   |
| Commitments to originate loans          |   | $                                                                   | 33,651 |   |   | $ | 29,691 |   |   | $ | 3,262 |   |   | $ | - |   |   | $ | 698 |   |
| Undrawn balances on lines of credit and |   |                                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| undrawn balances on credit reserves     |   |                                                                | 46,774 |   |   |   | 1,408 |   |   |   | 5,115 |   |   |   | 5,363 |   |   |   | 34,888 |   |
| Standby letters of credit               |   |                                                                | 375    |   |   |   | 208 |   |   |   | - |   |   |   | - |   |   |   | 167 |   |
| Total other commitments                 |   | $                                                                   | 80,800 |   |   | $ | 31,307 |   |   | $ | 8,377 |   |   | $ | 5,363 |   |   | $ | 35,753 |   |

----

|                      |   | Economic Value of Portfolio Equity |   |   | Net Interest Income Before PCL |   |
|---------------------------|--------|--------------------------------------------------------|--------|--------|----------------------------------------------------|--------|
| Change in Rates |   | Amount                                                 |   |   | Change                                             |   |   | % Change |   |   | Amount |   |   | Change |   |   | % Change |   |
|                      |   | (Dollars in thousands)                                 |   |
| + 400 bp                  |   | $                                                      | 65,421 |   |                                               | $      | (19,330 | ) |   |   | (22.8 | )% |   | $ | 38,136 |   |   | $ | 6,170 |   |   |   | 19.3 | % |
| + 300 bp                  |   |                                                   | 70,364 |   |                                               |   | (14,387 | ) |   |   | (17.0 | ) |   |   | 36,374 |   |   |   | 4,408 |   |   |   | 13.8 |   |
| + 200 bp                  |   |                                                   | 75,272 |   |                                               |   | (9,479 | ) |   |   | (11.2 | ) |   |   | 34,610 |   |   |   | 2,644 |   |   |   | 8.3 |   |
| + 100 bp                  |   |                                                   | 80,407 |   |                                               |   | (4,344 | ) |   |   | (5.1 | ) |   |   | 33,155 |   |   |   | 1,189 |   |   |   | 3.7 |   |
| Base                      |   |                                                   | 84,751 |   |                                               |   | - |   |   |   | - |   |   |   | 31,966 |   |   |   | - |   |   |   | - |   |

----

----

|                          |   | Year Ended December 31,    |   |   | Year Ended December 31,    |   |
|------------------------------------|--------|----------------------------|--------|--------|----------------------------|--------|
|                               |   | 2010 vs. 2009    |   |   | 2009 vs. 2008    |   |
|                               |   | Increase (Decrease) Due to |   |   | Increase (Decrease) Due to |   |
|                               |   | (In thousands)             |   |
|                               |   |                       |   |   |                       |   |   | Rate/ |   |   |   |   |   |   |   |   |   |   |   | Rate/ |   |   |   |   |
|                               |   | Volume                     |   |   | Rate                       |   |   | Volume |   |   | Total |   |   | Volume |   |   | Rate |   |   | Volume |   |   | Total |   |
| Interest income:                   |   |                       |   |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans receivable                   |   | $                          | (4,924 | )      |                       | $      | (1,619 | ) |   | $ | 176 |   |   | $ | (6,367 | ) |   | $ | (3,650 | ) |   | $ | (6,769 | ) |   | $ | 448 |   |   | $ | (9,971 | ) |
| Investment securities              |   |                       | (634   | )      |                       |   | (634 | ) |   |   | 634 |   |   |   | (634 | ) |   |   | (1,225 | ) |   |   | (239 | ) |   |   | 150 |   |   |   | (1,314 | ) |
| Mortgage-backed securities         |   |                       | 1,256  |   |                       |   | (277 | ) |   |   | (111 | ) |   |   | 868 |   |   |   | 1,656 |   |   |   | (213 | ) |   |   | (189 | ) |   |   | 1,254 |   |
| Other interest-earning assets      |   |                       | 18     |   |                       |   | (62 | ) |   |   | (12 | ) |   |   | (56 | ) |   |   | 320 |   |   |   | (316 | ) |   |   | (277 | ) |   |   | (273 | ) |
| Total earning assets               |   |                       | (4,284 | )      |                       |   | (2,592 | ) |   |   | 687 |   |   |   | (6,189 | ) |   |   | (2,899 | ) |   |   | (7,537 | ) |   |   | 132 |   |   |   | (10,304 | ) |
|                               |   |                       |   |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense:                  |   |                       |   |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                           |   |                       | (604   | )      |                       |   | (5,796 | ) |   |   | 242 |   |   |   | (6,158 | ) |   |   | (792 | ) |   |   | (6,072 | ) |   |   | 228 |   |   |   | (6,636 | ) |
| FHLB advances                      |   |                       | (837   | )      |                       |   | (60 | ) |   |   | 41 |   |   |   | (856 | ) |   |   | (137 | ) |   |   | (21 | ) |   |   | 2 |   |   |   | (156 | ) |
| Other interest-bearing liabilities |   |                       | (59    | )      |                       |   | (2 | ) |   |   | 0 |   |   |   | (61 | ) |   |   | (186 | ) |   |   | (315 | ) |   |   | 70 |   |   |   | (431 | ) |
| Total interest-bearing liabilities |   |                       | (1,500 | )      |                       |   | (5,858 | ) |   |   | 283 |   |   |   | (7,075 | ) |   |   | (1,115 | ) |   |   | (6,408 | ) |   |   | 300 |   |   |   | (7,223 | ) |
| Change in net interest income      |   | $                          | (2,784 | )      |                       | $      | 3,266 |   |   | $ | 404 |   |   | $ | 886 |   |   | $ | (1,784 | ) |   | $ | (1,129 | ) |   | $ | (168 | ) |   | $ | (3,081 | ) |

|                          |   | Year Ended December 31,    |   |   | Year Ended December 31,    |   |
|------------------------------------|--------|----------------------------|--------|--------|----------------------------|--------|
|                               |   | 2008 vs. 2007    |   |   | 2007 vs. 2006    |   |
|                               |   | Increase (Decrease) Due to |   |   | Increase (Decrease) Due to |   |
|                               |   | (In thousands)             |   |
|                               |   |                       |   |   |                       |   |   | Rate/ |   |   |   |   |   |   |   |   |   |   |   | Rate/ |   |   |   |   |
|                               |   | Volume                     |   |   | Rate                       |   |   | Volume |   |   | Total |   |   | Volume |   |   | Rate |   |   | Volume |   |   | Total |   |
| Interest income:                   |   |                       |   |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans receivable                   |   | $                          | (375   | )      |                       | $      | (9,473 | ) |   | $ | 55 |   |   | $ | (9,793 | ) |   | $ | 609 |   |   | $ | 1,157 |   |   | $ | 11 |   |   | $ | 1,777 |   |
| Investment securities              |   |                       | (331   | )      |                       |   | (71 | ) |   |   | 10 |   |   |   | (392 | ) |   |   | (51 | ) |   |   | (213 | ) |   |   | 4 |   |   |   | (260 | ) |
| Mortgage-backed securities         |   |                       | (126   | )      |                       |   | (67 | ) |   |   | 4 |   |   |   | (189 | ) |   |   | 343 |   |   |   | (8 | ) |   |   | (2 | ) |   |   | 333 |   |
| Other interest-earning assets      |   |                       | (53    | )      |                       |   | (310 | ) |   |   | 23 |   |   |   | (340 | ) |   |   | 452 |   |   |   | 8 |   |   |   | 16 |   |   |   | 476 |   |
| Total earning assets               |   |                       | (885   | )      |                       |   | (9,921 | ) |   |   | 92 |   |   |   | (10,714 | ) |   |   | 1,353 |   |   |   | 944 |   |   |   | 29 |   |   |   | 2,326 |   |
|                               |   |                       |   |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense:                  |   |                       |   |   |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                           |   |                       | (1,353 | )      |                       |   | (5,313 | ) |   |   | 261 |   |   |   | (6,405 | ) |   |   | 446 |   |   |   | 3,137 |   |   |   | 58 |   |   |   | 3,641 |   |
| FHLB advances                      |   |                       | 1,404  |   |                       |   | (117 | ) |   |   | (357 | ) |   |   | 930 |   |   |   | (162 | ) |   |   | (27 | ) |   |   | 7 |   |   |   | (182 | ) |
| Other interest-bearing liabilities |   |                       | 181    |   |                       |   | (432 | ) |   |   | (68 | ) |   |   | (319 | ) |   |   | 4 |   |   |   | 41 |   |   |   | 0 |   |   |   | 45 |   |
| Total interest-bearing liabilities |   |                       | 232    |   |                       |   | (5,862 | ) |   |   | (164 | ) |   |   | (5,794 | ) |   |   | 288 |   |   |   | 3,151 |   |   |   | 65 |   |   |   | 3,504 |   |
| Change in net interest income      |   | $                          | (1,117 | )      |                       | $      | (4,059 | ) |   | $ | 256 |   |   | $ | (4,920 | ) |   | $ | 1,065 |   |   | $ | (2,207 | ) |   | $ | (36 | ) |   | $ | (1,178 | ) |

----

|                                               |   | Year Ended December 31, |    |   | Year Ended December 31, |   |   | Year Ended December 31, |   |
|---------------------------------------------------------|--------|-------------------------|---------|--------|-------------------------|--------|--------|-------------------------|--------|
|                                                    |   | 2010                    |    |   | 2009                    |   |   | 2008                    |   |
|                                                    |   | (Dollars in thousands)  |    |
|                                                    |   |                    |    |   |                    |   |   | Average                 |   |   |   |   |   |   |   |   | Average |   |   |   |   |   |   |   |   | Average |   |
|                                                    |   | Average                 |    |   |                    |   |   | Yield/                  |   |   | Average |   |   |   |   |   | Yield/ |   |   | Average |   |   |   |   |   | Yield/ |   |
|                                                    |   | Balance                 |    |   | Interest                |   |   | Cost                    |   |   | Balance |   |   | Interest |   |   | Cost |   |   | Balance |   |   | Interest |   |   | Cost |   |
| Interest earning assets:                                |   |                    |    |   |                    |   |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans receivable                                        |   | $                       | 625,065 |   |                    | $      | 38,844 |                    |   |   | 6.21 | % |   | $ | 701,466 |   |   | $ | 45,211 |   |   |   | 6.45 | % |   | $ | 751,151 |   |   | $ | 55,182 |   |   |   | 7.35 | % |
| Investment securities                                   |   |                    | 0       |   |                    |   | 0      |                    |   |   | 0.00 |   |   |   | 16,204 |   |   |   | 634 |   |   |   | 3.91 |   |   |   | 43,685 |   |   |   | 1,948 |   |   |   | 4.46 |   |
| Mortgage-backed securities                              |   |                    | 92,097  |   |                    |   | 3,991  |                    |   |   | 4.33 |   |   |   | 65,681 |   |   |   | 3,123 |   |   |   | 4.75 |   |   |   | 34,827 |   |   |   | 1,869 |   |   |   | 5.37 |   |
| Other interest-earning assets                           |   |                    | 20,912  |   |                    |   | 36     |                    |   |   | 0.17 |   |   |   | 17,548 |   |   |   | 92 |   |   |   | 0.52 |   |   |   | 9,348 |   |   |   | 365 |   |   |   | 3.90 |   |
| Total earning assets                                    |   |                    | 738,074 |   |                    |   | 42,871 |                    |   |   | 5.81 |   |   |   | 800,899 |   |   |   | 49,060 |   |   |   | 6.13 |   |   |   | 839,011 |   |   |   | 59,364 |   |   |   | 7.08 |   |
|                                                    |   |                    |    |   |                    |   |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Nonearning assets                                       |   |                    | 73,668  |   |                    |   |   |                    |   |   |   |   |   |   | 65,605 |   |   |   |   |   |   |   |   |   |   |   | 63,657 |   |   |   |   |   |   |   |   |   |
| Total assets                                            |   | $                       | 811,742 |   |                    |   |   |                    |   |   |   |   |   | $ | 866,504 |   |   |   |   |   |   |   |   |   |   | $ | 902,668 |   |   |   |   |   |   |   |   |   |
|                                                    |   |                    |    |   |                    |   |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest bearing liabilities:                           |   |                    |    |   |                    |   |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Time deposits                                           |   | $                       | 435,509 |   |                    |   | 8,024  |                    |   |   | 1.84 |   |   | $ | 465,913 |   |   |   | 14,148 |   |   |   | 3.04 |   |   | $ | 479,642 |   |   |   | 19,447 |   |   |   | 4.05 |   |
| Demand deposits                                         |   |                    | 137,136 |   |                    |   | 248    |                    |   |   | 0.18 |   |   |   | 132,226 |   |   |   | 264 |   |   |   | 0.20 |   |   |   | 147,978 |   |   |   | 1,587 |   |   |   | 1.07 |   |
| Savings                                                 |   |                    | 24,423  |   |                    |   | 29     |                    |   |   | 0.12 |   |   |   | 24,921 |   |   |   | 47 |   |   |   | 0.19 |   |   |   | 19,734 |   |   |   | 61 |   |   |   | 0.31 |   |
| FHLB advances                                           |   |                    | 13,231  |   |                    |   | 377    |                    |   |   | 2.85 |   |   |   | 41,154 |   |   |   | 1,233 |   |   |   | 3.00 |   |   |   | 45,654 |   |   |   | 1,389 |   |   |   | 3.04 |   |
| Junior subordinated debentures                          |   |                    | 10,310  |   |                    |   | 334    |                    |   |   | 3.24 |   |   |   | 10,310 |   |   |   | 390 |   |   |   | 3.78 |   |   |   | 10,310 |   |   |   | 658 |   |   |   | 6.38 |   |
| Repurchase agreements                                   |   |                    | 2,546   |   |                    |   | 7      |                    |   |   | 0.27 |   |   |   | 4,775 |   |   |   | 12 |   |   |   | 0.25 |   |   |   | 9,105 |   |   |   | 175 |   |   |   | 1.92 |   |
|   Total interest-bearing liabilities          |   |                    | 623,155 |   |                    |   | 9,019  |                    |   |   | 1.45 |   |   |   | 679,299 |   |   |   | 16,094 |   |   |   | 2.37 |   |   |   | 712,423 |   |   |   | 23,317 |   |   |   | 3.27 |   |
|                                                    |   |                    |    |   |                    |   |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Noninterest bearing demand deposits                     |   |                    | 94,700  |   |                    |   | 0      |                    |   |   | 0.00 |   |   |   | 90,599 |   |   |   | 0 |   |   |   | 0.00 |   |   |   | 92,227 |   |   |   | 0 |   |   |   | 0.00 |   |
|   Total sources of funds                      |   |                    | 717,855 |   |                    |   | 9,019  |                    |   |   | 1.26 |   |   |   | 769,898 |   |   |   | 16,094 |   |   |   | 2.09 |   |   |   | 804,650 |   |   |   | 23,317 |   |   |   | 2.90 |   |
|                                                    |   |                    |    |   |                    |   |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other liabilities and stockholders'equity:              |   |                    |    |   |                    |   |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other liabilities                                       |   |                    | 7,035   |   |                    |   |   |                    |   |   |   |   |   |   | 8,477 |   |   |   |   |   |   |   |   |   |   |   | 10,323 |   |   |   |   |   |   |   |   |   |
| Stockholders' equity                                    |   |                    | 86,852  |   |                    |   |   |                    |   |   |   |   |   |   | 88,129 |   |   |   |   |   |   |   |   |   |   |   | 87,695 |   |   |   |   |   |   |   |   |   |
|   Total liabilities and stockholders' equity  |   | $                       | 811,742 |   |                    |   |   |                    |   |   |   |   |   | $ | 866,504 |   |   |   |   |   |   |   |   |   |   | $ | 902,668 |   |   |   |   |   |   |   |   |   |
| Net interest income                                     |   |                    |    |   |                    | $      | 33,852 |                    |   |   |   |   |   |   |   |   |   | $ | 32,966 |   |   |   |   |   |   |   |   |   |   | $ | 36,047 |   |   |   |   |   |
| Interest rate spread  (1)                     |   |                    |    |   |                    |   |   |                    |   |   | 4.55 | % |   |   |   |   |   |   |   |   |   |   | 4.04 | % |   |   |   |   |   |   |   |   |   |   | 4.18 | % |
| Net yield on earning assets  (2)              |   |                    |    |   |                    |   |   |                    |   |   | 4.59 | % |   |   |   |   |   |   |   |   |   |   | 4.12 | % |   |   |   |   |   |   |   |   |   |   | 4.30 | % |
|                                                    |   |                    |    |   |                    |   |   |                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Ratio of earning assets to interest bearing liabilities |   |                    |    |   |                    |   |   | 118.44                  | %      |   |   |   |   |   |   |   |   |   |   | 117.90 | % |   |   |   |   |   |   |   |   |   |   | 117.77 | % |

----

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----

| FIRST SOUTH BANCORP, INC. AND SUBSIDIARY       |
|------------------------------------------------|
| CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION |
| December 31, 2010 and 2009                     |

|                                                                                                                                    |   | 2010   |        |   | 2009   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|--------|-------------|--------|--------|--------|
| ASSETS                                                                                                                                  |   |   |        |   |   |   |
| Cash and due from banks                                                                                                                 |   | $      | 14,684,377  |   |   | $      | 17,758,370 |   |
| Interest-bearing deposits in financial institutions                                                                                     |   |   | 29,749,236  |   |   |   | 11,879,794 |   |
| Investment securities - available for sale                                                                                              |   |   | -           |   |   |   | 407,317 |   |
| Mortgage-backed securities - available for sale                                                                                         |   |   | 98,637,742  |   |   |   | 96,725,468 |   |
| Mortgage-backed securities - held for investment                                                                                        |   |   | 244,836     |   |   |   | 513,882 |   |
| Loans receivable, net                                                                                                                   |   |   |        |   |   |   |   |   |
| Held for sale                                                                                                                           |   |   | 4,464,040   |   |   |   | 6,548,980 |   |
| Held for investment                                                                                                                     |   |   | 601,610,242 |   |   |   | 652,106,538 |   |
| Premises and equipment, net                                                                                                             |   |   | 9,162,538   |   |   |   | 8,539,759 |   |
| Real estate owned                                                                                                                       |   |   | 11,616,390  |   |   |   | 10,561,071 |   |
| Federal Home Loan Bank of Atlanta stock, at cost which approximates market                                                              |   |   | 3,474,900   |   |   |   | 3,889,500 |   |
| Accrued interest receivable                                                                                                             |   |   | 2,336,527   |   |   |   | 3,318,141 |   |
| Goodwill                                                                                                                                |   |   | 4,218,576   |   |   |   | 4,218,576 |   |
| Mortgage servicing rights                                                                                                               |   |   | 1,357,659   |   |   |   | 1,278,688 |   |
| Identifiable intangible assets                                                                                                          |   |   | 102,180     |   |   |   | 133,620 |   |
| Income tax receivable                                                                                                                   |   |   | 2,864,993   |   |   |   | 1,831,598 |   |
| Prepaid expenses and other assets                                                                                                       |   |   | 12,721,610  |   |   |   | 10,179,333 |   |
|                                                                                                                                    |   |   |        |   |   |   |   |   |
| Total assets                                                                                                                            |   | $      | 797,245,846 |   |   | $      | 829,890,635 |   |
|                                                                                                                                    |   |   |        |   |   |   |   |   |
| LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                    |   |   |        |   |   |   |   |   |
| Deposits:                                                                                                                               |   |   |        |   |   |   |   |   |
| Demand                                                                                                                                  |   | $      | 234,501,026 |   |   | $      | 224,507,362 |   |
| Savings                                                                                                                                 |   |   | 24,498,789  |   |   |   | 23,137,391 |   |
| Large denomination certificates of deposit                                                                                              |   |   | 222,578,449 |   |   |   | 224,198,974 |   |
| Other time                                                                                                                              |   |   | 207,886,450 |   |   |   | 216,667,331 |   |
|                                                                                                                                    |   |   |        |   |   |   |   |   |
| Total deposits                                                                                                                          |   |   | 689,464,714 |   |   |   | 688,511,058 |   |
|                                                                                                                                    |   |   |        |   |   |   |   |   |
| Borrowed money                                                                                                                          |   |   | 11,503,110  |   |   |   | 37,380,388 |   |
| Junior subordinated debentures                                                                                                          |   |   | 10,310,000  |   |   |   | 10,310,000 |   |
| Other liabilities                                                                                                                       |   |   | 6,454,818   |   |   |   | 7,475,085 |   |
|                                                                                                                                    |   |   |        |   |   |   |   |   |
| Total liabilities                                                                                                                       |   |   | 717,732,642 |   |   |   | 743,676,531 |   |
|                                                                                                                                    |   |   |        |   |   |   |   |   |
| Commitments and contingencies (Note 14)                                                                                                 |   |   |        |   |   |   |   |   |
|                                                                                                                                    |   |   |        |   |   |   |   |   |
| Common stock, $.01 par value, 25,000,000 shares authorized, 11,254,222 issued; 9,751,271 and 9,742,296 shares outstanding, respectively |   |   | 97,513      |   |   |   | 97,423 |   |
| Additional paid-in capital                                                                                                              |   |   | 35,795,586  |   |   |   | 35,841,364 |   |
| Retained earnings, substantially restricted                                                                                             |   |   | 74,956,772  |   |   |   | 82,111,114 |   |
| Treasury stock at cost                                                                                                                  |   |   | (31,967,269 | )      |   |   | (32,158,074 | ) |
| Accumulated other comprehensive income, net                                                                                             |   |   | 630,602     |   |   |   | 322,277 |   |
|                                                                                                                                    |   |   |        |   |   |   |   |   |
| Total stockholders' equity                                                                                                              |   |   | 79,513,204  |   |   |   | 86,214,104 |   |
|                                                                                                                                    |   |   |        |   |   |   |   |   |
| Total liabilities and stockholders' equity                                                                                              |   | $      | 797,245,846 |   |   | $      | 829,890,635 |   |

----

| FIRST SOUTH BANCORP, INC. AND SUBSIDIARY     |
|----------------------------------------------|
| CONSOLIDATED STATEMENTS OF OPERATIONS        |
| Years Ended December 31, 2010, 2009 and 2008 |

|                                                   |   | 2010   |       |   | 2009   |   |       | 2008   |   |
|--------------------------------------------------------|--------|--------|------------|--------|--------|--------|------------|--------|--------|
| Interest income                                        |   |   |       |   |   |   |       |   |   |
| Interest and fees on loans                             |   | $      | 38,843,771 |   |   | $      | 45,211,260 |   |   | $ | 55,182,193 |   |
| Interest and dividends on investments and deposits     |   |   | 4,027,268  |   |   |   | 3,848,639  |   |   |   | 4,181,602 |   |
|                                                   |   |   |       |   |   |   |       |   |   |   |   |   |
| Total interest income                                  |   |   | 42,871,039 |   |   |   | 49,059,899 |   |   |   | 59,363,795 |   |
|                                                   |   |   |       |   |   |   |       |   |   |   |   |   |
| Interest expense                                       |   |   |       |   |   |   |       |   |   |   |   |   |
| Interest on deposits                                   |   |   | 8,301,551  |   |   |   | 14,459,345 |   |   |   | 21,095,044 |   |
| Interest on borrowings                                 |   |   | 384,161    |   |   |   | 1,244,664  |   |   |   | 1,563,978 |   |
| Interest on junior subordinated debentures             |   |   | 333,689    |   |   |   | 389,677    |   |   |   | 657,576 |   |
|                                                   |   |   |       |   |   |   |       |   |   |   |   |   |
| Total interest expense                                 |   |   | 9,019,401  |   |   |   | 16,093,686 |   |   |   | 23,316,598 |   |
|                                                   |   |   |       |   |   |   |       |   |   |   |   |   |
| Net interest income before provision for credit losses |   |   | 33,851,638 |   |   |   | 32,966,213 |   |   |   | 36,047,197 |   |
| Provision for credit losses                            |   |   | 22,151,787 |   |   |   | 7,180,000  |   |   |   | 4,043,600 |   |
|                                                   |   |   |       |   |   |   |       |   |   |   |   |   |
| Net interest income                                    |   |   | 11,699,851 |   |   |   | 25,786,213 |   |   |   | 32,003,597 |   |
|                                                   |   |   |       |   |   |   |       |   |   |   |   |   |
| Other income                                           |   |   |       |   |   |   |       |   |   |   |   |   |
| Fees and service charges                               |   |   | 6,864,083  |   |   |   | 7,377,019  |   |   |   | 7,750,195 |   |
| Loan servicing fees                                    |   |   | 747,387    |   |   |   | 679,673    |   |   |   | 658,073 |   |
| Loss on sale of real estate, net                       |   |   | (523,173   | )      |   |   | (200,732   | )      |   |   | (80,542 | ) |
| Gain on sale of mortgage loans                         |   |   | 1,155,690  |   |   |   | 1,197,029  |   |   |   | 586,571 |   |
| Gain on sale of mortgage-backed securities             |   |   | 1,682,453  |   |   |   | -          |   |   |   | 97,537 |   |
| Gain on sale of investment securities                  |   |   | 2,406      |   |   |   | 917,866    |   |   |   | - |   |
| Other income                                           |   |   | 915,022    |   |   |   | 988,865    |   |   |   | 1,071,726 |   |
|                                                   |   |   |       |   |   |   |       |   |   |   |   |   |
| Total other income                                     |   |   | 10,843,868 |   |   |   | 10,959,720 |   |   |   | 10,083,560 |   |
|                                                   |   |   |       |   |   |   |       |   |   |   |   |   |
| General and administrative expenses                    |   |   |       |   |   |   |       |   |   |   |   |   |
| Compensation and fringe benefits                       |   |   | 15,583,817 |   |   |   | 14,118,842 |   |   |   | 13,750,085 |   |
| Federal insurance premiums                             |   |   | 1,158,544  |   |   |   | 1,253,627  |   |   |   | 280,372 |   |
| Premises and equipment                                 |   |   | 1,741,462  |   |   |   | 1,823,628  |   |   |   | 1,969,006 |   |
| Advertising                                            |   |   | 148,380    |   |   |   | 123,513    |   |   |   | 112,758 |   |
| Payroll and other taxes                                |   |   | 1,392,624  |   |   |   | 1,327,449  |   |   |   | 1,246,743 |   |
| Data processing                                        |   |   | 2,576,386  |   |   |   | 2,452,593  |   |   |   | 2,630,821 |   |
| Amortization of intangible assets                      |   |   | 493,785    |   |   |   | 488,602    |   |   |   | 434,260 |   |
| Other                                                  |   |   | 3,629,836  |   |   |   | 3,756,547  |   |   |   | 3,740,652 |   |
|                                                   |   |   |       |   |   |   |       |   |   |   |   |   |
| Total general and administrative expenses              |   |   | 26,724,834 |   |   |   | 25,344,801 |   |   |   | 24,164,697 |   |
|                                                   |   |   |       |   |   |   |       |   |   |   |   |   |
| Income (loss) before income taxes                      |   |   | (4,181,115 | )      |   |   | 11,401,132 |   |   |   | 17,922,460 |   |
| Income tax expense (benefit)                           |   |   | (1,801,319 | )      |   |   | 4,365,296  |   |   |   | 6,934,640 |   |
|                                                   |   |   |       |   |   |   |       |   |   |   |   |   |
| NET INCOME (LOSS)                                      |   |   | (2,379,796 | )      |   |   | 7,035,836  |   |   |   | 10,987,820 |   |
| Other comprehensive income (loss), net of taxes        |   |   | 308,325    |   |   |   | (857,211   | )      |   |   | 802,984 |   |
|                                                   |   |   |       |   |   |   |       |   |   |   |   |   |
| Comprehensive income (loss)                            |   | $      | (2,071,471 | )      |   | $      | 6,178,625  |   |   | $ | 11,790,804 |   |
|                                                   |   |   |       |   |   |   |       |   |   |   |   |   |
| Net income per common share                            |   |   |       |   |   |   |       |   |   |   |   |   |
| Basic                                                  |   | $      | (0.24      | )      |   | $      | 0.72       |   |   | $ | 1.13 |   |
| Diluted                                                |   | $      | (0.24      | )      |   | $      | 0.72       |   |   | $ | 1.12 |   |

----

| FIRST SOUTH BANCORP, INC. AND SUBSIDIARY                         |
|------------------------------------------------------------------|
| CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY |
| Years Ended December 31, 2010, 2009 and 2008                     |

|                                 |   | Commonstock |   |   | Additionalpaid-incapital |   |       | Retainedearnings,substantiallyrestricted |   |   | Treasurystock |   |   | AccumulatedothercomprehensiveIncome,net |        |   | Total  |   |
|--------------------------------------|--------|-------------|--------|--------|--------------------------|--------|------------|------------------------------------------|--------|--------|---------------|--------|--------|-----------------------------------------|-------------|--------|--------|--------|
|                                 |   |        |   |   |                     |   |       |                                     |   |   |          |   |   |                                    |        |   |   |   |
| Balance, December 31, 2007           |   | $           | 98,087 |   |                     | $      | 36,761,824 |                                     |   | $      | 79,679,027    |   |   | $                                       | (30,880,120 | )      |   | $      | 376,504 |   |   | $ | 86,035,322 |   |
|                                 |   |        |   |   |                     |   |       |                                     |   |   |          |   |   |                                    |        |   |   |   |   |   |   |   |   |   |
| Net income                           |   |        | -      |   |                     |   | -          |                                     |   |   | 10,987,820    |   |   |                                    | -           |   |   |   | - |   |   |   | 10,987,820 |   |
| Other comprehensive income, net      |   |        | -      |   |                     |   | -          |                                     |   |   | -             |   |   |                                    | -           |   |   |   | 802,984 |   |   |   | 802,984 |   |
| Exercise of stock options            |   |        | 905    |   |                     |   | (1,682,353 | )                                        |   |   | -             |   |   |                                    | 1,926,743   |   |   |   | - |   |   |   | 245,295 |   |
| Tax benefit, stock options exercised |   |        | -      |   |                     |   | 452,317    |                                     |   |   | -             |   |   |                                    | -           |   |   |   | - |   |   |   | 452,317 |   |
| Shares traded to exercise options    |   |        | (208   | )      |                     |   | 355,505    |                                     |   |   | -             |   |   |                                    | (449,979    | )      |   |   | - |   |   |   | (94,682 | ) |
| Acquisition of treasury shares       |   |        | (1,403 | )      |                     |   | -          |                                     |   |   | -             |   |   |                                    | (2,844,009  | )      |   |   | - |   |   |   | (2,845,412 | ) |
| Stock based compensation             |   |        | -      |   |                     |   | 37,133     |                                     |   |   | -             |   |   |                                    | -           |   |   |   | - |   |   |   | 37,133 |   |
| Dividends ($.80 per share)           |   |        | -      |   |                     |   | -          |                                     |   |   | (7,799,752    | )      |   |                                    | -           |   |   |   | - |   |   |   | (7,799,752 | ) |
|                                 |   |        |   |   |                     |   |       |                                     |   |   |          |   |   |                                    |        |   |   |   |   |   |   |   |   |   |
| Balance, December 31, 2008           |   |        | 97,381 |   |                     |   | 35,924,426 |                                     |   |   | 82,867,095    |   |   |                                    | (32,247,365 | )      |   |   | 1,179,488 |   |   |   | 87,821,025 |   |
|                                 |   |        |   |   |                     |   |       |                                     |   |   |          |   |   |                                    |        |   |   |   |   |   |   |   |   |   |
| Net income                           |   |        | -      |   |                     |   | -          |                                     |   |   | 7,035,836     |   |   |                                    | -           |   |   |   | - |   |   |   | 7,035,836 |   |
| Other comprehensive loss, net        |   |        | -      |   |                     |   | -          |                                     |   |   | -             |   |   |                                    | -           |   |   |   | (857,211 | ) |   |   | (857,211 | ) |
| Exercise of stock options            |   |        | 42     |   |                     |   | (62,804    | )                                        |   |   | -             |   |   |                                    | 89,291      |   |   |   | - |   |   |   | 26,529 |   |
| Tax benefit, stock options exercised |   |        | -      |   |                     |   | 4,482      |                                     |   |   | -             |   |   |                                    | -           |   |   |   | - |   |   |   | 4,482 |   |
| Stock based compensation             |   |        | -      |   |                     |   | (24,740    | )                                        |   |   | -             |   |   |                                    | -           |   |   |   | - |   |   |   | (24,740 | ) |
| Dividends ($.80 per share)           |   |        | -      |   |                     |   | -          |                                     |   |   | (7,791,817    | )      |   |                                    | -           |   |   |   | - |   |   |   | (7,791,817 | ) |
|                                 |   |        |   |   |                     |   |       |                                     |   |   |          |   |   |                                    |        |   |   |   |   |   |   |   |   |   |
| Balance, December 31, 2009           |   |        | 97,423 |   |                     |   | 35,841,364 |                                     |   |   | 82,111,114    |   |   |                                    | (32,158,074 | )      |   |   | 322,277 |   |   |   | 86,214,104 |   |
|                                 |   |        |   |   |                     |   |       |                                     |   |   |          |   |   |                                    |        |   |   |   |   |   |   |   |   |   |
| Net loss                             |   |        | -      |   |                     |   | -          |                                     |   |   | (2,379,796    | )      |   |                                    | -           |   |   |   | - |   |   |   | (2,379,796 | ) |
| Other comprehensive income, net      |   |        | -      |   |                     |   | -          |                                     |   |   | -             |   |   |                                    | -           |   |   |   | 308,325 |   |   |   | 308,325 |   |
| Exercise of stock options            |   |        | 90     |   |                     |   | (131,524   | )                                        |   |   | -             |   |   |                                    | 190,805     |   |   |   | - |   |   |   | 59,371 |   |
| Tax benefit, stock options exercised |   |        | -      |   |                     |   | 2,436      |                                     |   |   | -             |   |   |                                    | -           |   |   |   | - |   |   |   | 2,436 |   |
| Stock based compensation             |   |        | -      |   |                     |   | 83,310     |                                     |   |   | -             |   |   |                                    | -           |   |   |   | - |   |   |   | 83,310 |   |
| Dividends ($.49 per share)           |   |        | -      |   |                     |   | -          |                                     |   |   | (4,774,546    | )      |   |                                    | -           |   |   |   | - |   |   |   | (4,774,546 | ) |
|                                 |   |        |   |   |                     |   |       |                                     |   |   |          |   |   |                                    |        |   |   |   |   |   |   |   |   |   |
| Balance, December 31, 2010           |   | $           | 97,513 |   |                     | $      | 35,795,586 |                                     |   | $      | 74,956,772    |   |   | $                                       | (31,967,269 | )      |   | $      | 630,602 |   |   | $ | 79,513,204 |   |

----

| FIRST SOUTH BANCORP, INC. AND SUBSIDIARY     |
|----------------------------------------------|
| CONSOLIDATED STATEMENTS OF CASH FLOWS        |
| Years Ended December 31, 2010, 2009 and 2008 |

|                                                                                       |   | 2010   |        |   | 2009   |   |         | 2008   |   |
|--------------------------------------------------------------------------------------------|--------|--------|-------------|--------|--------|--------|--------------|--------|--------|
| Operating activities:                                                                      |   |   |        |   |   |   |         |   |   |
| Net income (loss)                                                                          |   | $      | (2,379,796  | )      |   | $      | 7,035,836    |   |   | $ | 10,987,820 |   |
| Adjustments to reconcile net income to net cash provided by (used in) operating activities |   |   |        |   |   |   |         |   |   |   |   |   |
| Provision for credit losses                                                                |   |   | 22,151,787  |   |   |   | 7,180,000    |   |   |   | 4,043,600 |   |
| Depreciation                                                                               |   |   | 733,974     |   |   |   | 818,398      |   |   |   | 879,832 |   |
| Amortization of intangibles                                                                |   |   | 493,785     |   |   |   | 488,602      |   |   |   | 434,260 |   |
| Accretion of discounts on securities, net                                                  |   |   | -           |   |   |   | (63,241      | )      |   |   | 7,383 |   |
| Deferred income taxes                                                                      |   |   | (3,352,686  | )      |   |   | (1,298,149   | )      |   |   | (862,742 | ) |
| (Gain) loss on disposal of premises and equipment                                          |   |   | (5,796      | )      |   |   | (5,566       | )      |   |   | 1,540 |   |
| Loss on sale of other real estate owned                                                    |   |   | 523,173     |   |   |   | 200,732      |   |   |   | 80,542 |   |
| Gain on sale of loans held for sale                                                        |   |   | (1,155,690  | )      |   |   | (1,197,029   | )      |   |   | (586,571 | ) |
| Gain on sale of mortgage-backed securities held for sale                                   |   |   | (1,682,453  | )      |   |   | -            |   |   |   | (97,537 | ) |
| Gain on sale of investment securities available for sale                                   |   |   | (2,406      | )      |   |   | (917,866     | )      |   |   | - |   |
| Stock based compensation (income) expense                                                  |   |   | 83,310      |   |   |   | (24,740      | )      |   |   | 37,133 |   |
| Originations of loans held for sale, net                                                   |   |   | (84,218,335 | )      |   |   | (109,618,929 | )      |   |   | (38,549,148 | ) |
| Proceeds from sale of loans held for sale                                                  |   |   | 39,086,569  |   |   |   | 34,347,308   |   |   |   | 37,686,012 |   |
| Other operating activities                                                                 |   |   | 4,181,416   |   |   |   | (4,018,215   | )      |   |   | 3,011,045 |   |
|                                                                                       |   |   |        |   |   |   |         |   |   |   |   |   |
| Net cash provided by (used in) operating activities                                        |   |   | (25,543,148 | )      |   |   | (67,072,859  | )      |   |   | 17,073,169 |   |
|                                                                                       |   |   |        |   |   |   |         |   |   |   |   |   |
| Investing activities:                                                                      |   |   |        |   |   |   |         |   |   |   |   |   |
| Proceeds from maturities of investment securities available for sale                       |   |   | -           |   |   |   | 20,000,000   |   |   |   | 13,000,000 |   |
| Proceeds from sale of investment securities available for sale                             |   |   | 507,406     |   |   |   | 20,917,866   |   |   |   | - |   |
| Purchases of investment securities available for sale                                      |   |   | -           |   |   |   | (5,000,000   | )      |   |   | - |   |
| Proceeds from principal repayments and sales of                                            |   |   |        |   |   |   |         |   |   |   |   |   |
| mortgage-backed securities available for sale                                              |   |   | 48,554,519  |   |   |   | 10,558,314   |   |   |   | 10,155,010 |   |
| Proceeds from principal repayments of mortgage-backed securities held for investment       |   |   | 269,046     |   |   |   | 318,339      |   |   |   | 459,541 |   |
| Originations of loans held for investment, net of principal repayments                     |   |   | 10,970,396  |   |   |   | 64,040,224   |   |   |   | 3,476,254 |   |
| Proceeds from disposal of premises and equipment                                           |   |   | 5,796       |   |   |   | 11,813       |   |   |   | - |   |
| Proceeds from disposal of other real estate owned                                          |   |   | 12,558,072  |   |   |   | 10,543,291   |   |   |   | 3,883,475 |   |
| Purchase (sale) of FHLB stock                                                              |   |   | 414,600     |   |   |   | (230,900     | )      |   |   | (448,500 | ) |
| Purchases of premises and equipment                                                        |   |   | (1,356,753  | )      |   |   | (314,475     | )      |   |   | (497,902 | ) |
|                                                                                       |   |   |        |   |   |   |         |   |   |   |   |   |
| Net cash provided by investing activities                                                  |   |   | 71,923,082  |   |   |   | 120,844,472  |   |   |   | 30,027,878 |   |
|                                                                                       |   |   |        |   |   |   |         |   |   |   |   |   |
| Financing activities:                                                                      |   |   |        |   |   |   |         |   |   |   |   |   |
| Net increase (decrease) in deposit accounts                                                |   |   | 953,656     |   |   |   | (27,915,738  | )      |   |   | (44,942,787 | ) |
| Net increase (decrease) in FHLB borrowings                                                 |   |   | (25,000,000 | )      |   |   | (10,000,000  | )      |   |   | 10,000,000 |   |
| Purchase of treasury shares                                                                |   |   | -           |   |   |   | -            |   |   |   | (2,845,412 | ) |
| Proceeds from exercise of stock options, net of tax benefit                                |   |   | 61,807      |   |   |   | 31,011       |   |   |   | 602,930 |   |
| Cash paid for dividends                                                                    |   |   | (6,722,670  | )      |   |   | (7,790,977   | )      |   |   | (7,715,777 | ) |
| Net change in repurchase agreements                                                        |   |   | (877,278    | )      |   |   | (5,178,104   | )      |   |   | 491,071 |   |
|                                                                                       |   |   |        |   |   |   |         |   |   |   |   |   |
| Net cash used in financing activities                                                      |   |   | (31,584,485 | )      |   |   | (50,853,808  | )      |   |   | (44,409,975 | ) |
|                                                                                       |   |   |        |   |   |   |         |   |   |   |   |   |
| Increase in cash and cash equivalents                                                      |   |   | 14,795,449  |   |   |   | 2,917,805    |   |   |   | 2,691,072 |   |
|                                                                                       |   |   |        |   |   |   |         |   |   |   |   |   |
| Cash and cash equivalents, beginning of year                                               |   |   | 29,638,164  |   |   |   | 26,720,359   |   |   |   | 24,029,287 |   |
|                                                                                       |   |   |        |   |   |   |         |   |   |   |   |   |
| Cash and cash equivalents, end of year                                                     |   | $      | 44,433,613  |   |   | $      | 29,638,164   |   |   | $ | 26,720,359 |   |

----

| FIRST SOUTH BANCORP, INC. AND SUBSIDIARY                                                  |
|-------------------------------------------------------------------------------------------|
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                |
| As of December 31, 2010 and 2009 and for the Years Ended December 31, 2010, 2009 and 2008 |

----

----

----

|                                                       |   | Years ended December 31, |     |
|------------------------------------------------------------|--------|--------------------------|----------|
|                                                       |   | 2010                     |     |   | 2009 |   |   | 2008 |   |
| Unrealized gains (losses) on securities available for sale |   | $                        | 509,628  |   |   | $ | (1,416,877 | ) |   | $ | 1,327,246 |   |
| Income tax benefit (expense)                               |   |                     | (201,303 | ) |   |   | 559,666 |   |   |   | (524,262 | ) |
| Other comprehensive income (loss), net                     |   | $                        | 308,325  |   |   | $ | (857,211 | ) |   | $ | 802,984 |   |

----

----

|                         |   |      |    |   | Gross      |   |   | Gross      |   |   | Estimated |   |
|------------------------------|--------|-----------|---------|--------|------------|--------|--------|------------|--------|--------|-----------|--------|
|                         |   | Amortized |    |   | unrealized |   |   | unrealized |   |   | market    |   |
|                         |   | cost      |    |   | gains      |   |   | losses     |   |   | value     |   |
| December 31, 2010:           |   |      |    |   |       |   |   |       |   |   |      |   |
| None                         |   | $         | -       |   |       | $      | -      |       |   | $      | -         |   |   | $ | - |   |
|                         |   | $         | -       |   |       | $      | -      |       |   | $      | -         |   |   | $ | - |   |
|                         |   |      |    |   |       |   |   |       |   |   |      |   |   |   |   |   |
| December 31, 2009:           |   |      |    |   |       |   |   |       |   |   |      |   |   |   |   |   |
| Triangle Capital Corporation |   | $         | 505,000 |   |       | $      | -      |       |   | $      | (97,683   | )      |   | $ | 407,317 |   |
|                         |   | $         | 505,000 |   |       | $      | -      |       |   | $      | (97,683   | )      |   | $ | 407,317 |   |

|                                        |   |      |       |   | Gross      |   |      | Gross      |   |   | Estimated |   |
|---------------------------------------------|--------|-----------|------------|--------|------------|--------|-----------|------------|--------|--------|-----------|--------|
|                                        |   | Amortized |       |   | unrealized |   |      | unrealized |   |   | market    |   |
|                                        |   | cost      |       |   | gains      |   |      | losses     |   |   | value     |   |
| December 31, 2010:                          |   |      |       |   |       |   |      |       |   |   |      |   |
| FHLMC PCs, maturing from years 2012 to 2041 |   | $         | 97,595,424 |   |       | $      | 1,408,729 |       |   | $      | 366,411   |   |   | $ | 98,637,742 |   |
| December 31, 2009:                          |   |      |       |   |       |   |      |       |   |   |      |   |   |   |   |   |
| FHLMC PCs, maturing from years 2011 to 2040 |   | $         | 96,095,095 |   |       | $      | 1.147,242 |       |   | $      | 516,869   |   |   | $ | 96,725,468 |   |

|                            |   |      |    |   | Gross      |   |   | Gross      |   |   | Estimated |   |
|---------------------------------|--------|-----------|---------|--------|------------|--------|--------|------------|--------|--------|-----------|--------|
|                            |   | Amortized |    |   | unrealized |   |   | unrealized |   |   | market    |   |
|                            |   | cost      |    |   | gains      |   |   | losses     |   |   | value     |   |
| December 31, 2010:              |   |      |    |   |       |   |   |       |   |   |      |   |
| FHLMC PCs, maturing during 2013 |   | $         | 244,836 |   |       | $      | 6,466  |       |   | $      | -         |   |   | $ | 251,302 |   |
| December 31, 2009:              |   |      |    |   |       |   |   |       |   |   |      |   |   |   |   |   |
| FHLMC PCs, maturing during 2013 |   | $         | 513,882 |   |       | $      | 4,574  |       |   | $      | -         |   |   | $ | 518,456 |   |

|                           |   | 2010                |       |
|--------------------------------|--------|---------------------|------------|
|                           |   | Less Than 12 Months |       |   | 12 Months or More |   |   | Total |   |
|                           |   | Fairvalue           |       |   | Unrealizedlosses |   |   | Fairvalue |   |   | Unrealizedlosses |   |   | Fairvalue |   |   | Unrealizedlosses |   |
| Securities available for sale: |   |                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| FHLMC PCs                      |   | $                   | 23,313,888 |   |   | $ | 254,092 |   |   | $ | 10,305,675 |   |   | $ | 112,319 |   |   | $ | 33,619,563 |   |   | $ | 366,411 |   |

----

|                           |   | 2009                |       |
|--------------------------------|--------|---------------------|------------|
|                           |   | Less Than 12 Months |       |   | 12 Months or More |   |   | Total |   |
|                           |   | Fairvalue           |       |   | Unrealizedlosses |   |   | Fairvalue |   |   | Unrealizedlosses |   |   | Fairvalue |   |   | Unrealizedlosses |   |
| Securities available for sale: |   |                |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| FHLMC PCs                      |   | $                   | 49,044,596 |   |   | $ | 516,869 |   |   | $ | - |   |   | $ | - |   |   | $ | 49,044,596 |   |   | $ | 516,869 |   |

|                                   |   |      |       |   | Estimated |   |
|----------------------------------------|--------|-----------|------------|--------|-----------|--------|
|                                   |   | Amortized |       |   | market    |   |
|                                   |   | cost      |       |   | value     |   |
| Due one year or less                   |   | $         | -          |   |      | $      | - |   |
| Due after one year through five years  |   |      | 722,211    |   |      |   | 788,758 |   |
| Due after five years through ten years |   |      | 1,003,527  |   |      |   | 1,054,717 |   |
| Due after ten years                    |   |      | 95,869,686 |   |      |   | 96,794,267 |   |
| Total                                  |   | $         | 97,595,424 |   |      | $      | 98,637,742 |   |

|                                            |   | 2010   |        |   | 2009   |   |
|-------------------------------------------------|--------|--------|-------------|--------|--------|--------|
| Mortgage loans                                  |   | $      | 56,502,887  |   |   | $      | 52,960,619 |   |
| Consumer loans                                  |   |   | 82,478,462  |   |   |   | 89,642,641 |   |
| Commercial loans                                |   |   | 479,081,436 |   |   |   | 521,182,385 |   |
| Lease receivables                               |   |   | 8,147,973   |   |   |   | 9,817,909 |   |
| Total                                           |   |   | 626,210,758 |   |   |   | 673,603,554 |   |
| Less:  Allowance for loan losses      |   |   | (18,830,288 | )      |   |   | (13,503,940 | ) |
|     Deferred loan fees, net |   |   | (1,306,188  | )      |   |   | (1,444,096 | ) |
| Loans receivable, net                           |   | $      | 606,074,282 |   |   | $      | 658,655,518 |   |

----

|                         |   | Allowance for Loanand Lease Losses |        |   | Allowance forUnfundedCommitments |   |    | Allowance forCredit Losses |   |
|------------------------------|--------|--------------------------------------------------------|-------------|--------|---------------------------------------|--------|---------|--------------------------------------|--------|
| Balance at December 31, 2007 |   | $                                                      | 9,486,479   |   |                                  | $      | 402,643 |                                 |   | $ | 9,889,122 |   |
| Provisions for credit losses |   |                                                   | 4,106,248   |   |                                  |   | (62,648 | )                                    |   |   | 4,043,600 |   |
| Loans charged off            |   |                                                   | (2,167,630  | )      |                                  |   | -       |                                 |   |   | (2,167,630 | ) |
| Recoveries                   |   |                                                   | 192,609     |   |                                  |   | -       |                                 |   |   | 192,609 |   |
| Balance at December 31, 2008 |   |                                                   | 11,617,706  |   |                                  |   | 339,995 |                                 |   |   | 11,957,701 |   |
| Provisions for credit losses |   |                                                   | 7,279,713   |   |                                  |   | (99,713 | )                                    |   |   | 7,180,000 |   |
| Loans charged off            |   |                                                   | (5,774,831  | )      |                                  |   | -       |                                 |   |   | (5,774,831 | ) |
| Recoveries                   |   |                                                   | 381,352     |   |                                  |   | -       |                                 |   |   | 381,352 |   |
| Balance at December 31, 2009 |   |                                                   | 13,503,940  |   |                                  |   | 240,282 |                                 |   |   | 13,744,222 |   |
| Provisions for credit losses |   |                                                   | 22,155,367  |   |                                  |   | (3,580  | )                                    |   |   | 22,151,787 |   |
| Loans charged off            |   |                                                   | (17,783,337 | )      |                                  |   | -       |                                 |   |   | (17,783,337 | ) |
| Recoveries                   |   |                                                   | 954,318     |   |                                  |   | -       |                                 |   |   | 954,318 |   |
| Balance at December 31, 2010 |   | $                                                      | 18,830,288  |   |                                  | $      | 236,702 |                                 |   | $ | 19,066,990 |   |

|                                                                   |   | December 31, |       |
|------------------------------------------------------------------------|--------|--------------|------------|
| Loans contractually past due over 90 days and/or on nonaccrual status: |   | 2010         |       |   | 2009 |   |
| Mortgage residential                                                   |   | $            | 3,207,203  |   |   | $ | 767,141 |   |
| Consumer and commercial                                                |   |         | 40,802,877 |   |   |   | 11,170,640 |   |
| Total                                                                  |   | $            | 44,010,080 |   |   | $ | 11,937,781 |   |

|                              |   | December 31, |       |
|-----------------------------------|--------|--------------|------------|
|                              |   | 2010         |       |   | 2009 |   |
| Land                              |   | $            | 3,118,489  |   |   | $ | 3,102,730 |   |
| Office buildings and improvements |   |         | 8,053,862  |   |   |   | 7,703,338 |   |
| Furniture, fixtures and equipment |   |         | 5,784,169  |   |   |   | 5,126,100 |   |
| Vehicles                          |   |         | 644,499    |   |   |   | 523,965 |   |
| Construction in process           |   |         | 138,853    |   |   |   | 68,131 |   |
|                              |   |         | 17,739,872 |   |   |   | 16,524,264 |   |
| Less accumulated depreciation     |   |         | 8,577,334  |   |   |   | 7,984,505 |   |
| Total                             |   | $            | 9,162,538  |   |   | $ | 8,539,759 |   |

| 2011       |   | $      | 482,014   |   |
|------------|--------|--------|-----------|--------|
| 2012       |   |   | 388,796   |   |
| 2013       |   |   | 291,285   |   |
| 2014       |   |   | 68,192    |   |
| 2015       |   |   | 52,440    |   |
| Thereafter |   |   | 61,819    |   |
| Total      |   | $      | 1,344,546 |   |

----

| 2011                |   | $      | 205,486,503 |   |
|---------------------|--------|--------|-------------|--------|
| 2012                |   |   | 223,235,026 |   |
| 2013                |   |   | 1,382,379   |   |
| 2014                |   |   | 274,709     |   |
| 2015                |   |   | 86,282      |   |
| Thereafter          |   |   | -           |   |
| Total time deposits |   | $      | 430,464,899 |   |

|                             |   | December 31, |   |
|----------------------------------|--------|--------------|--------|
| Year Ended:                      |   | 2010         |   |   | 2009 |   |   | 2008 |   |
| Dividend growth rate             |   |         | 5.0    | % |   |   | 5.3 | % |   |   | 11.8 | % |
| Expected volatility              |   |         | 36.6   | % |   |   | 36.6 | % |   |   | 24.0 | % |
| Average risk-free interest rates |   |         | 3.01   | % |   |   | 2.78 | % |   |   | 3.34 | % |
| Expected lives                   |   | 6 years      |   |   | 6 years |   |   | 6 years |   |

----

|                             |   | OptionsAvailable |    |   | OptionsOutstanding |   |    | Price  |   |   | AggregateIntrinsicValue |   |
|----------------------------------|--------|------------------|---------|--------|--------------------|--------|---------|--------|--------|--------|-------------------------|--------|
| Outstanding at December 31, 2008 |   |             | 947,000 |   |               |   | 172,295 |   |   | $      | 17.52                   |   |   | $ | (854,558 | ) |
| Granted                          |   |             | (35,500 | )      |               |   | 35,500  |   |   |   | 11.25                   |   |   |   |   |   |
| Forfeited                        |   |             | 3,000   |   |               |   | (31,825 | )      |   |   | 20.00                   |   |   |   |   |   |
| Exercised                        |   |             | -       |   |               |   | (4,200  | )      |   |   | 6.32                    |   |   |   |   |   |
| Outstanding at December 31, 2009 |   |             | 914,500 |   |               |   | 171,770 |   |   | $      | 16.04                   |   |   | $ | (985,969 | ) |
| Granted                          |   |             | (35,500 | )      |               |   | 35,500  |   |   |   | 11.25                   |   |   |   |   |   |
| Forfeited                        |   |             | 10,500  |   |               |   | (16,854 | )      |   |   | 15.80                   |   |   |   |   |   |
| Exercised                        |   |             | -       |   |               |   | (8,975  | )      |   |   | 6.62                    |   |   |   |   |   |
| Outstanding at December 31, 2010 |   |             | 889,500 |   |               |   | 181,441 |   |   | $      | 15.60                   |   |   | $ | (1,655,997 | ) |

|                    |                |   | Outstanding |   |    | Exercisable |   |
|-------------------------|---------------------|--------|-------------|--------|---------|-------------|--------|
| Range of Exercise Price |                |   | Shares      |   |    | Life        |   |   | Price |   |   | Shares |   |   | Price |   |
| $                       | 6.17 – 13.82  |   |        |   | 84,608  |        |   |   | 6.21 |   |   | $ | 10.48 |   |   |   | 32,108 |   |   | $ | 9.06 |   |
| $                       | 14.97 – 16.49 |   |        |   | 33,958  |        |   |   | 2.01 |   |   |   | 16.07 |   |   |   | 33,958 |   |   |   | 16.07 |   |
| $                       | 16.77 – 25.22 |   |        |   | 50,625  |        |   |   | 6.16 |   |   |   | 20.67 |   |   |   | 41,459 |   |   |   | 20.78 |   |
| $                       | 26.17 – 33.27 |   |        |   | 12,250  |        |   |   | 5.52 |   |   |   | 28.65 |   |   |   | 10,800 |   |   |   | 28.65 |   |
|                    |                |   |        |   | 181,441 |        |   |   | 5.37 |   |   |   | 15.60 |   |   |   | 118,325 |   |   |   | 16.96 |   |

| Year Ended:                    |   | December 31, 2010 |    |   | December 31, 2009 |   |
|--------------------------------|--------|-------------------|---------|--------|-------------------|--------|
|                           |   | Shares            |    |   | Price             |   |   | Shares |   |   | Price |   |
| Nonvested at beginning of year |   |              | 58,158  |   |              | $      | 16.16 |   |   |   | 43,275 |   |   | $ | 22.68 |   |
| Granted                        |   |              | 35,500  |   |              |   | 11.28 |   |   |   | 35,500 |   |   |   | 11.25 |   |
| Forfeited                      |   |              | (12,000 | )      |              |   | 13.60 |   |   |   | (4,250 | ) |   |   | 15.39 |   |
| Vested                         |   |              | (18,542 | )      |              |   | 19.10 |   |   |   | (16,367 | ) |   |   | 22.96 |   |
| Nonvested at end of year       |   |              | 63,116  |   |              |   | 13.04 |   |   |   | 58,158 |   |   |   | 16.16 |   |

----

|                                               |   | Year Ended December 31, |    |
|----------------------------------------------------|--------|-------------------------|---------|
|                                               |   | 2010                    |    |   | 2009 |   |   | 2008 |   |
| Increased (reduced) net income before income taxes |   | $                       | (83,310 | ) |   | $ | 24,739 |   |   | $ | (37,132 | ) |
| Increased (reduced) net income                     |   |                    | (80,782 | ) |   |   | 11,202 |   |   |   | (36,228 | ) |
| Reduced basic earnings per share                   |   |                    | .00     |   |   |   | .00 |   |   |   | .00 |   |
| Reduced diluted earnings per share                 |   |                    | .00     |   |   |   | .00 |   |   |   | (.01 | ) |

|     |   | Years Ended December 31, |       |
|----------|--------|--------------------------|------------|
|     |   | 2010                     |       |   | 2009 |   |   | 2008 |   |
| Current  |   |                     |       |   |   |   |   |   |   |
| Federal  |   | $                        | 1,187,685  |   |   | $ | 4,586,057 |   |   | $ | 6,516,536 |   |
| State    |   |                     | 363,682    |   |   |   | 1,077,388 |   |   |   | 1,280,846 |   |
|     |   |                     | 1,551,367  |   |   |   | 5,663,445 |   |   |   | 7,797,382 |   |
| Deferred |   |                     |       |   |   |   |   |   |   |   |   |   |
| Federal  |   |                     | (2,758,539 | ) |   |   | (1,068,097 | ) |   |   | (709,851 | ) |
| State    |   |                     | (594,147   | ) |   |   | (230,052 | ) |   |   | (152,891 | ) |
|     |   |                     | (3,352,686 | ) |   |   | (1,298,149 | ) |   |   | (862,742 | ) |
| Total    |   | $                        | (1,801,319 | ) |   | $ | 4,365,296 |   |   | $ | 6,934,640 |   |

|                                          |   | Years Ended December 31, |       |
|-----------------------------------------------|--------|--------------------------|------------|
|                                          |   | 2010                     |       |   | 2009 |   |   | 2008 |   |
| Expected income tax expense (benefit) at 35%  |   | $                        | (1,463,390 | ) |   | $ | 3,990,396 |   |   | $ | 6,272,861 |   |
| State income taxes, net of federal income tax |   |                     | (149,802   | ) |   |   | 550,768 |   |   |   | 733,171 |   |
| Other expenses and adjustments                |   |                     | (188,127   | ) |   |   | (175,868 | ) |   |   | (71,392 | ) |
| Total                                         |   | $                        | (1,801,319 | ) |   | $ | 4,365,296 |   |   | $ | 6,934,640 |   |

----

|                                             |   | Years Ended December 31, |      |
|--------------------------------------------------|--------|-----------------------------------------|-----------|
|                                             |   | 2010                                    |      |   | 2009 |   |
| Deferred income tax assets                       |   |                                    |      |   |   |   |
| Deferred directors' fees                         |   | $                                       | 543,358   |   |   | $ | 543,015 |   |
| Allowance for credit losses                      |   |                                    | 7,432,713 |   |   |   | 5,330,220 |   |
| Employee benefits                                |   |                                    | 710,078   |   |   |   | 707,344 |   |
| Loans mark-to-market                             |   |                                    | 90,031    |   |   |   | 210,126 |   |
| Other                                            |   |                                    | 438,558   |   |   |   | 205,178 |   |
|                                             |   |                                    | 9,214,738 |   |   |   | 6,995,883 |   |
| Deferred income tax liabilities                  |   |                                    |      |   |   |   |   |   |
| Depreciation and amortization                    |   |                                    | 1,609,010 |   |   |   | 2,737,419 |   |
| Carrying value – land                      |   |                                    | 395,000   |   |   |   | 395,000 |   |
| Mortgage servicing rights                        |   |                                    | 536,275   |   |   |   | 505,082 |   |
| Deferred loan origination fees and costs         |   |                                    | 673,049   |   |   |   | 712,349 |   |
| Unrealized gain on securities available for sale |   |                                    | 411,716   |   |   |   | 210,413 |   |
|                                             |   |                                    | 3,625,050 |   |   |   | 4,560,263 |   |
| Net deferred income tax asset                    |   | $                                       | 5,589,688 |   |   | $ | 2,435,620 |   |

|                                                   |   |   |   |   |                   |   |   |                          |   |   |                   |   |   | Minimum to be Well |   |
|--------------------------------------------------------|--------|--------|--------|--------|------------------------|--------|--------|-------------------------------|--------|--------|------------------------|--------|--------|-----------------------------------|--------|
|                                                   |   |   |   |   |                   |   |   |                          |   |   |                   |   |   | Capitalized under            |   |
|                                                   |   |   |   |   |                   |   |   | Minimum for Capital |   |   | Prompt Corrective |   |
|                                                   |   | Actual |   |   | Adequacy Purposes |   |   | Action Provisions        |   |
|                                              |   | Amount |   |   | Ratio                  |   |   | Amount                        |   |   | Ratio                  |   |   | Amount                            |   |   | Ratio |   |
| December 31, 2010:                                |   |   |   |   |                   |   |   |                          |   |   |                   |   |   |                              |   |   |   |   |   |   |   |   |   |   |
| Total Capital (to Risk Weighted Assets) |   | $      | 80,665 |   |                   |   | 13.4   | %                             |   | $      | 48,111                 |   |   |                              | 8.0    | % |   | $ | 60,139 |   |   |   | 10.0 | % |
| Tier 1 Capital (to Risk Weighted Assets)               |   |   | 73,005 |   |                   |   | 12.1   | %                             |   |   | 24,055                 |   |   |                              | 4.0    | % |   |   | 36,083 |   |   |   | 6.0 | % |
| Tier 1 Capital (to Average Assets)                     |   |   | 73,005 |   |                   |   | 9.1    | %                             |   |   | 32,180                 |   |   |                              | 4.0    | % |   |   | 40,225 |   |   |   | 5.0 | % |
|                                                   |   |   |   |   |                   |   |   |                          |   |   |                   |   |   |                              |   |   |   |   |   |   |   |   |   |   |
| December 31, 2009:                                     |   |   |   |   |                   |   |   |                          |   |   |                   |   |   |                              |   |   |   |   |   |   |   |   |   |   |
| Total Capital (to Risk Weighted Assets)                |   | $      | 88,282 |   |                   |   | 13.5   | %                             |   | $      | 52,250                 |   |   |                              | 8.0    | % |   | $ | 65,312 |   |   |   | 10.0 | % |
| Tier 1 Capital (to Risk Weighted Assets)               |   |   | 80,049 |   |                   |   | 12.3   | %                             |   |   | 26,125                 |   |   |                              | 4.0    | % |   |   | 39,187 |   |   |   | 6.0 | % |
| Tier 1 Capital (to Average Assets)                     |   |   | 80,049 |   |                   |   | 9.6    | %                             |   |   | 33,506                 |   |   |                              | 4.0    | % |   |   | 41,883 |   |   |   | 5.0 | % |

----

|                                |   | Years Ended December 31, |       |
|-------------------------------------|--------|--------------------------|------------|
|                                |   | 2010                     |       |   | 2009 |   |   | 2008 |   |
|                                |   |                     |       |   |   |   |   |   |   |
| Net income (loss)-(numerator)       |   | $                        | (2,379,796 | ) |   | $ | 7,035,836 |   |   | $ | 10,987,820 |   |
| Weighted average shares outstanding |   |                     |       |   |   |   |   |   |   |   |   |   |
| for basic EPS-(denominator)         |   |                     | 9,744,870  |   |   |   | 9,738,225 |   |   |   | 9,761,944 |   |
| Dilutive effect of stock options    |   |                     | 177        |   |   |   | 19 |   |   |   | 19,817 |   |
| Adjusted shares for diluted EPS     |   |                     | 9,745,047  |   |   |   | 9,738,244 |   |   |   | 9,781,761 |   |

| 14. | FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK |
|-----|------------------------------------------------------------------------------------------------------|

----

| 14. | FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK (Continued) |
|-----|------------------------------------------------------------------------------------------------------------------|

|                                               |   | December 31, |       |
|----------------------------------------------------|--------|--------------|------------|
|                                               |   | 2010         |       |   | 2009 |   |
|                                               |   |         |       |   |   |   |
| Commitments to extend credit                       |   | $            | 33,651,000 |   |   | $ | 47,338,000 |   |
| Undrawn balances on lines of credit and undrawn    |   |         |       |   |   |   |   |   |
| balances on credit reserves (overdraft protection) |   |         | 46,774,000 |   |   |   | 49,756,000 |   |
| Standby letters of credit                          |   |         | 375,000    |   |   |   | 1,007,000 |   |
| Total                                              |   | $            | 80,800,000 |   |   | $ | 98,101,000 |   |

|                                                  |   | December 31,             |       |
|-------------------------------------------------------|--------|--------------------------|------------|
|                                                  |   | 2010                     |       |   | 2009 |   |   | 2008 |   |
| CONDENSED BALANCE SHEETS                              |   |                     |       |   |   |   |   |   |   |
| Cash                                                  |   | $                        | 72,566     |   |   | $ | 1,994,259 |   |   | $ | 2,003,541 |   |
| Investment in wholly-owned subsidiary                 |   |                     | 77,957,013 |   |   |   | 84,821,988 |   |   |   | 86,637,727 |   |
| Other assets                                          |   |                     | 11,793,625 |   |   |   | 11,656,316 |   |   |   | 11,437,376 |   |
| Total assets                                          |   | $                        | 89,823,204 |   |   | $ | 98,472,563 |   |   | $ | 100,078,644 |   |
| Junior subordinated debentures                        |   | $                        | 10,310,000 |   |   | $ | 10,310,000 |   |   | $ | 10,310,000 |   |
| Other liabilities                                     |   |                     | 0          |   |   |   | 1,948,459 |   |   |   | 1,947,619 |   |
| Stockholders' equity                                  |   |                     | 79,513,204 |   |   |   | 86,214,104 |   |   |   | 87,821,025 |   |
| Total liabilities and stockholders' equity            |   | $                        | 89,823,204 |   |   | $ | 98,472,563 |   |   | $ | 100,078,644 |   |
|                                                  |   |                     |       |   |   |   |   |   |   |   |   |   |
|                                                  |   | Years Ended December 31, |       |
|                                                  |   | 2010                     |       |   | 2009 |   |   | 2008 |   |
| CONDENSED STATEMENTS OF INCOME                        |   |                     |       |   |   |   |   |   |   |   |   |   |
| Interest on junior subordinated debentures            |   | $                        | 333,689    |   |   | $ | 389,677 |   |   | $ | 657,576 |   |
| Equity in earnings (loss) of subsidiary               |   |                     | (2,040,065 | ) |   |   | 7,322,965 |   |   |   | 11,481,054 |   |
| Miscellaneous income (loss)                           |   |                     | (673,421   | ) |   |   | (676,806 | ) |   |   | 164,342 |   |
| Net income (loss)                                     |   | $                        | (2,379,797 | ) |   | $ | 7,035,836 |   |   | $ | 10,987,820 |   |
|                                                  |   |                     |       |   |   |   |   |   |   |   |   |   |
|                                                  |   | Years Ended December 31, |       |
|                                                  |   | 2010                     |       |   | 2009 |   |   | 2008 |   |
| CONDENSED STATEMENTS OF CASH FLOWS                    |   |                     |       |   |   |   |   |   |   |   |   |   |
| Operating activities:                                 |   |                     |       |   |   |   |   |   |   |   |   |   |
| Net income (loss)                                     |   | $                        | (2,379,797 | ) |   | $ | 7,035,836 |   |   | $ | 10,987,820 |   |
| Adjustments to reconcile net income (loss) to         |   |                     |       |   |   |   |   |   |   |   |   |   |
| net cash used in operating activities:                |   |                     |       |   |   |   |   |   |   |   |   |   |
| Amortization of intangibles                           |   |                     | -          |   |   |   | - |   |   |   | 18,767 |   |
| Equity in undistributed (earnings) loss of subsidiary |   |                     | 2,040,065  |   |   |   | (7,322,965 | ) |   |   | (11,481,054 | ) |
| Other operating activities                            |   |                     | (137,309   | ) |   |   | (218,940 | ) |   |   | (718,390 | ) |
| Net cash used in operating activities                 |   |                     | (4,557,171 | ) |   |   | (506,069 | ) |   |   | (1,192,857 | ) |

----

| Investing activities:                                  |   |   |       |   |   |   |       |   |   |
|--------------------------------------------------------|--------|--------|------------|--------|--------|--------|------------|--------|--------|
| Payments for investments in and advances to subsidiary |   |   | -          |   |   |   | -          |   |   |   | - |   |
| Repayments of advances to subsidiary                   |   |   | -          |   |   |   | -          |   |   |   | - |   |
| Upstream dividend received from First South Bank       |   |   | 9,503,265  |   |   |   | 8,281,493  |   |   |   | 11,156,103 |   |
| Net cash provided by investing activities              |   |   | 9,503,265  |   |   |   | 8,281,493  |   |   |   | 11,156,103 |   |
|                                                   |   |   |       |   |   |   |       |   |   |   |   |   |
| Financing activities:                                  |   |   |       |   |   |   |       |   |   |   |   |   |
| Proceeds (payments) from exercise of stock options     |   |   | (145,117   | )      |   |   | 6,271      |   |   |   | 640,063 |   |
| Purchase of treasury shares                            |   |   | -          |   |   |   | -          |   |   |   | (2,845,412 | ) |
| Cash paid for dividends                                |   |   | (6,722,670 | )      |   |   | (7,790,977 | )      |   |   | (7,715,777 | ) |
| Net cash used in financing activities                  |   |   | (6,867,787 | )      |   |   | (7,784,706 | )      |   |   | (9,921,126 | ) |
|                                                   |   |   |       |   |   |   |       |   |   |   |   |   |
| Net increase (decrease) in cash                        |   |   | (1,921,693 | )      |   |   | (9,282     | )      |   |   | 42,120 |   |
| Cash at beginning of year                              |   |   | 1,994,259  |   |   |   | 2,003,541  |   |   |   | 1,961,421 |   |
| Cash at end of year                                    |   | $      | 72,566     |   |   | $      | 1,994,259  |   |   | $ | 2,003,541 |   |

|                         |   | Fourth |   |   | Third  |   |   | Second |   |   | First  |   |
|------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| 2010:                        |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest income              |   | $      | 9,928  |   |   | $      | 10,963 |   |   | $      | 10,829 |   |   | $ | 11,151 |   |
| Interest expense             |   |   | 2,167  |   |   |   | 2,222  |   |   |   | 2,258  |   |   |   | 2,372 |   |
| Provision for credit losses  |   |   | 13,700 |   |   |   | 3,962  |   |   |   | 2,070  |   |   |   | 2,420 |   |
| Noninterest income           |   |   | 1,920  |   |   |   | 3,400  |   |   |   | 2,830  |   |   |   | 2,694 |   |
| Noninterest expense          |   |   | 6,739  |   |   |   | 6,745  |   |   |   | 6,741  |   |   |   | 6,500 |   |
| Income tax expense (benefit) |   |   | (4,260 | )      |   |   | 424    |   |   |   | 1,032  |   |   |   | 1,003 |   |
| Net income (loss)            |   | $      | (6,498 | )      |   | $      | 1,010  |   |   | $      | 1,558  |   |   | $ | 1,550 |   |
|                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income per common share  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                        |   | $      | (.66   | )      |   | $      | .10    |   |   | $      | .16    |   |   | $ | .16 |   |
| Diluted                      |   | $      | (.66   | )      |   | $      | .10    |   |   | $      | .16    |   |   | $ | .16 |   |
|                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                         |   | Fourth |   |   | Third  |   |   | Second |   |   | First  |   |
| 2009:                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest income              |   | $      | 11,851 |   |   | $      | 12,196 |   |   | $      | 12,442 |   |   | $ | 12,571 |   |
| Interest expense             |   |   | 2,997  |   |   |   | 3,922  |   |   |   | 4,546  |   |   |   | 4,629 |   |
| Provision for credit losses  |   |   | 2,700  |   |   |   | 1,260  |   |   |   | 1,700  |   |   |   | 1,520 |   |
| Noninterest income           |   |   | 2,525  |   |   |   | 2,401  |   |   |   | 3,213  |   |   |   | 2,821 |   |
| Noninterest expense          |   |   | 6,299  |   |   |   | 6,530  |   |   |   | 6,514  |   |   |   | 6,002 |   |
| Income tax expense           |   |   | 871    |   |   |   | 1,123  |   |   |   | 1,135  |   |   |   | 1,236 |   |
| Net income                   |   | $      | 1,509  |   |   | $      | 1,762  |   |   | $      | 1,760  |   |   | $ | 2,005 |   |
|                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income per common share  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                        |   | $      | .15    |   |   | $      | .18    |   |   | $      | .18    |   |   | $ | .21 |   |
| Diluted                      |   | $      | .15    |   |   | $      | .18    |   |   | $      | .18    |   |   | $ | .21 |   |

----

|                   |   | December 31, 2010 |        |   | December 31, 2009 |   |
|------------------------|--------|-------------------|-------------|--------|-------------------|--------|
|                   |   | Estimated         |        |   | Carrying          |   |   | Estimated |   |   | Carrying |   |
|                   |   | fair value        |        |   | amount            |   |   | fair value |   |   | amount |   |
|                   |   |              |        |   |              |   |   |   |   |   |   |   |
| 1 - 4 family mortgages |   | $                 | 55,641,742  |   |              | $      | 55,450,132 |   |   | $ | 52,859,820 |   |   | $ | 51,820,569 |   |
| Consumer               |   |              | 79,928,987  |   |              |   | 79,469,024 |   |   |   | 89,057,502 |   |   |   | 88,892,520 |   |
| Non-residential        |   |              | 471,155,126 |   |              |   | 471,155,126 |   |   |   | 517,942,429 |   |   |   | 517,942,429 |   |
| Total                  |   | $                 | 606,725,855 |   |              | $      | 606,074,282 |   |   | $ | 659,859,751 |   |   | $ | 658,655,518 |   |

|                                 |   | 2010   |        |   | 2009   |   |
|--------------------------------------|--------|--------|-------------|--------|--------|--------|
| Certificates of deposit:             |   |   |        |   |   |   |
| Carrying amount                      |   | $      | 430,464,899 |   |   | $      | 440,866,305 |   |
| Estimated fair value                 |   |   | 435,394,161 |   |   |   | 444,572,051 |   |
| Advances for Federal Home Loan Bank: |   |   |        |   |   |   |   |   |
| Carrying amount                      |   | $      | 10,000,000  |   |   | $      | 35,000,000 |   |
| Estimated fair value                 |   |   | 10,270,226  |   |   |   | 35,550,962 |   |

----

|                           |   |     |        |   | Quoted Pricesin ActiveMarkets forIdenticalAssets |   |   | SignificantOtherObservableInputs |   |   | SignificantUnobservableInputs |   |
|--------------------------------|--------|----------|-------------|--------|-----------------------------------------------------------------|--------|--------|----------------------------------|--------|--------|-------------------------------|--------|
| Description                    |   | 12-31-10 |        |   | (Level 1)                                                  |   |   | (Level 2)                   |   |   | (Level 3)                |   |
| Available for sale securities: |   |     |        |   |                                                            |   |   |                             |   |   |                          |   |
| Investment                     |   | $        | -           |   |                                                            | $      | -      |                             |   | $      | -                             |   |   | $ | - |   |
| Mortgage-backed                |   |     | 98,637,742  |   |                                                            |   | -      |                             |   |   | 98,637,742                    |   |   |   | - |   |
| Other real estate owned        |   |     | 11,616,390  |   |                                                            |   | -      |                             |   |   | 11,616,390                    |   |   |   | - |   |
| Total December 31, 2010        |   | $        | 110,254,132 |   |                                                            | $      | -      |                             |   | $      | 110,254,132                   |   |   | $ | - |   |

|                           |   |     |        |   | Quoted Pricesin ActiveMarkets forIdentical Assets |   |    | SignificantOtherObservableInputs |   |   | SignificantUnobservableInputs |   |
|--------------------------------|--------|----------|-------------|--------|-----------------------------------------------------------------------|--------|---------|----------------------------------|--------|--------|-------------------------------|--------|
| Description                    |   | 12-31-09 |        |   | (Level 1)                                                        |   |    | (Level 2)                   |   |   | (Level 3)                |   |
| Available for sale securities: |   |     |        |   |                                                                  |   |    |                             |   |   |                          |   |
| Investment                     |   | $        | 407,317     |   |                                                                  | $      | 407,317 |                             |   | $      | -                             |   |   | $ | - |   |
| Mortgage-backed                |   |     | 96,725,468  |   |                                                                  |   | -       |                             |   |   | 96,725,468                    |   |   |   | - |   |
| Other real estate owned        |   |     | 10,561,071  |   |                                                                  |   | -       |                             |   |   | 10,561,071                    |   |   |   | - |   |
| Total December 31, 2009        |   | $        | 107,693,856 |   |                                                                  | $      | 407,317 |                             |   | $      | 107,286,539                   |   |   | $ | - |   |

----

|                                      |   |     |       |   | Quoted Pricesin ActiveMarkets forIdentical Assets |   |   | SignificantOtherObservableInputs |   |   | SignificantUnobservableInputs |   |
|-------------------------------------------|--------|----------|------------|--------|-----------------------------------------------------------------------|--------|--------|----------------------------------|--------|--------|-------------------------------|--------|
| Description                               |   | 12-31-10 |       |   | (Level 1)                                                        |   |   | (Level 2)                   |   |   | (Level 3)                |   |
| Impaired loans, net of specific allowance |   | $        | 20,389,105 |   |                                                                  | $      | -      |                             |   | $      | 20,389,105                    |   |   | $ | - |   |
| Total December 31, 2010                   |   | $        | 20,389,105 |   |                                                                  | $      | -      |                             |   | $      | 20,389,105                    |   |   | $ | - |   |

|                                      |   |     |       |   | Quoted Pricesin ActiveMarkets forIdentical Assets |   |   | SignificantOtherObservableInputs |   |   | SignificantUnobservableInputs |   |
|-------------------------------------------|--------|----------|------------|--------|-----------------------------------------------------------------------|--------|--------|----------------------------------|--------|--------|-------------------------------|--------|
| Description                               |   | 12-31-09 |       |   | (Level 1)                                                        |   |   | (Level 2)                   |   |   | (Level 3)                |   |
| Impaired loans, net of specific allowance |   | $        | 17,850,368 |   |                                                                  | $      | -      |                             |   | $      | 17,850,368                    |   |   | $ | - |   |
| Total December 31, 2009                   |   | $        | 17,850,368 |   |                                                                  | $      | -      |                             |   | $      | 17,850,368                    |   |   | $ | - |   |

----

|                                             |   | Year ended December 31, |       |
|--------------------------------------------------|--------|-------------------------|------------|
|                                             |   | 2010                    |       |   | 2009 |   |   | 2008 |   |
| Real estate acquired in settlement of loans      |   | $                       | 17,374,113 |   |   | $ | 15,838,273 |   |   | $ | 10,882,390 |   |
| Exchange of loans for mortgage-backed securities |   |                    | 48,372,395 |   |   |   | 75,485,932 |   |   |   | 3,399,071 |   |
| Cash paid for interest                           |   |                    | 9,083,583  |   |   |   | 16,135,628 |   |   |   | 23,358,551 |   |
| Cash paid for income taxes                       |   |                    | 2,515,530  |   |   |   | 5,712,432 |   |   |   | 7,567,051 |   |
| Dividends declared, not paid                     |   |                    | -          |   |   |   | 1,948,459 |   |   |   | 1,947,619 |   |

| LIBOR + 2.95% junior subordinated debentures owed to First South Preferred Trust I due September 26, 2033 |   | $      | 10,000,000 |   |
|-----------------------------------------------------------------------------------------------------------|--------|--------|------------|--------|
| LIBOR + 2.95% junior subordinated debentures owed to First South Preferred Trust I due September 26, 2033 |   |   | 310,000    |   |
| Total junior subordinated debentures owed to unconsolidated subsidiary trust                              |   | $      | 10,310,000 |   |

| Extensions of credit at December 31, 2009     |   | $      | 1,077,849 |   |
|-----------------------------------------------|--------|--------|-----------|--------|
| New extensions of credit made during the year |   |   | 10,511    |   |
| Repayments during the year                    |   |   | (170,851  | )      |
| Extensions of credit at December 31, 2010     |   | $      | 917,509   |   |

----

| Frederick N. HolscherChairmanPartnerRodman, Holscher,Francisco, & Peck, P.A.Washington, NC |         | Marshall T. SingletonVice ChairmanCo-OwnerB. E. Singleton & SonsWashington, NC |         | Linley H. Gibbs, Jr.RetiredWashington, NC  |         | Frederick H. HowdyPresidentDrs. Freshwater & Howdy, P.A.Washington, NC |
|------------------------------------------------------------------------------------------------|--------------|------------------------------------------------------------------------------------|--------------|-------------------------------------------------|--------------|----------------------------------------------------------------------------|
|                                                                                           |         |                                                                               |         |                                            |         |                                                                       |
| Charles E. Parker, Jr.Senior Vice PresidentRobinson & Stith InsuranceNew Bern, NC          |    | Thomas A. VannPresident andChief Executive OfficerFirst South BankWashington, NC   |    |                                            |    |                                                                       |

| Thomas A. Vann           |         | J. Randy Woodson         |         | William L. Wall             |         | John F. Nicholson, Jr.   |
|--------------------------|--------------|--------------------------|--------------|-----------------------------|--------------|--------------------------|
| President and            |         | Executive Vice President |         | Executive Vice President    |         | Executive Vice President |
| Chief Executive Officer  |         | Chief Operating Officer  |         | Chief Financial Officer and |         | Chief Credit Officer     |
|                     |         |                     |         | Secretary                   |         |                     |
|                     |         |                     |         |                        |         |                     |
| Paul S. Jaber            |         | Sherry L. Correll        |         | Mary R. Boyd                |         | Kristie W. Hawkins       |
| Executive Vice President |         | Executive Vice President |         | Executive Vice President    |         | Treasurer and            |
| Mortgage Lending         |    | Bank Operations          |    | Loan Servicing              |    | Controller               |

| Otto C. Burrell, Jr.  |         | Robert M. Hertenstein    |         | Kenneth K. Howard, Jr. |         | Dennis A. Nichols     |
|-----------------------|--------------|--------------------------|--------------|------------------------|--------------|-----------------------|
| Senior Vice President |         | Senior Vice President    |         | Senior Vice President  |         | Senior Vice President |
| Area Executive        |         | Area Executive           |         | Area Executive         |         | Area Executive        |
| Coastal Region        |         | Cape Fear Region         |         | Tar Region             |         | Neuse/Pamlico Region  |
|                  |         |                     |         |                   |         |                  |
| Robert C. Pfeiffer    |         | Donnie L. G. Bunn        |         |                   |         |                  |
| Senior Vice President |         | President                |         |                   |         |                  |
| Area Executive        |         | First South Leasing, LLC |         |                   |         |                  |
| Albemarle Region      |    | Greenville, NC           |    |                   |    |                  |

| Eric S. Clark    |         | Joseph M. Johnson     |         | Thomas S. Lewis |         | Kenneth W. Marshall, Jr. |
|------------------|--------------|-----------------------|--------------|-----------------|--------------|--------------------------|
| Vice President   |         | Senior Vice President |         | Vice President  |         | Vice President           |
| City Executive   |         | City Executive        |         | City Executive  |         | City Executive           |
| Greenville, NC   |         | Durham, NC            |         | Rocky Mount, NC |         | Outer Banks, NC          |
|             |         |                  |         |            |         |                     |
| William P. Stone |         | Cornelius F. Sullivan |         |            |         |                     |
| Vice President   |         | Senior Vice President |         |            |         |                     |
| City Executive   |         | City Executive        |         |            |         |                     |
| Lumberton, NC    |    | Raleigh, NC           |    |            |    |                     |

----

| Buxton                     |   | Hope Mills                 |   | Raleigh                     |
|----------------------------|--------|----------------------------|--------|-----------------------------|
| 47560 NC Highway 12        |   | 3103 North Main Street     |   | 4800 Six Forks Road         |
| Buxton, NC 27920           |   | Hope Mills, NC 28348       |   | Suite 115                   |
| (252) 995-3250             |   | (910) 423-0952             |   | Raleigh, NC 27609           |
|                       |   |                       |   | (919) 783-5222              |
| Chocowinity                |   | Kinston                    |   |                        |
| 2999 Highway 17 South      |   | 2430 Heritage Street       |   | Tarboro                     |
| Chocowinity, NC 27817      |   | Kinston, NC 28504          |   | 100 East Hope Lodge Street  |
| (252) 940-4970             |   | (252) 523-9449             |   | Tarboro, NC 27886           |
|                       |   |                       |   | (252) 823-0157              |
| Dunn                       |   | Lumberton                  |   |                        |
| 904-A West Broad Street    |   | 600 North Chestnut Street  |   | Washington                  |
| Dunn, NC 28334             |   | Lumberton, NC 28358        |   | 1311 Carolina Avenue        |
| (910) 892-2861             |   | (910) 739-3274             |   | Washington, NC 27889        |
|                       |   |                       |   | (252) 946-4178              |
| Durham                     |   | 3000 North Elm Street      |   |                        |
| 4215-01 University Drive   |   | Lumberton, NC 28358        |   | 300 North Market Street     |
| Durham, NC 27707           |   | (910) 608-5031             |   | Washington, NC 27889        |
| (919) 403-1000             |   |                       |   | (252) 940-4945              |
|                       |   | Nags Head                  |   |                        |
| Elizabeth City             |   | 2236 South Croatan Highway |   | 1328 John Small Avenue      |
| 604 East Ehringhaus Street |   | Suite 6                    |   | Washington, NC 27889        |
| Elizabeth City, NC 27909   |   | Nags Head, NC 27959        |   | (252) 940-5000              |
| (252) 335-0848             |   | (252) 441-9935             |   |                        |
|                       |   |                       |   | Wilmington                  |
| Fayetteville               |   | New Bern                   |   | 2601 Irongate Drive         |
| 241 Green Street           |   | 202 Craven Street          |   | Suite 102                   |
| Fayetteville, NC 28301     |   | New Bern, NC 28560         |   | Wilmington, NC 28412        |
| (910) 483-3681             |   | (252) 636-2997             |   | (910) 798-6102              |
|                       |   |                       |   |                        |
| 705 Executive Place        |   | 1725 Glenburnie Road       |   | Loan Production Office      |
| Fayetteville, NC 28305     |   | New Bern, NC 28562         |   | 3210 North Croatan Highway  |
| (910) 484-2116             |   | (252) 636-3569             |   | Unit 2                      |
|                       |   |                       |   | Kill Devil Hills, NC 27948  |
| Grantsboro                 |   | Rocky Mount                |   | (252) 441-9834              |
| 11560 NC Highway 55        |   | 300 Sunset Avenue          |   |                        |
| Suite 11                   |   | Rocky Mount, NC 27804      |   | First South Leasing         |
| Grantsboro, NC 28529       |   | (252) 972-9661             |   | 1035 Director Court, Unit C |
| (252) 745-5001             |   |                       |   | Greenville, NC 27858        |
|                       |   | 2901 Sunset Avenue         |   | (252) 355-4536              |
| Greenville                 |   | Rocky Mount, NC 27804      |   |                        |
| 301 East Arlington Blvd    |   | (252) 451-1259             |   | Operations Center and       |
| Greenville, NC 27858       |   |                       |   | Credit Administration       |
| (252) 321-2600             |   | 1378 Benvenue Road         |   | 220 Creekside Drive         |
|                       |   | Rocky Mount, NC 27804      |   | Washington, NC 27889        |
| 907 East Firetower Road    |   | (252) 442-8375             |   | (252) 946-4178              |
| Greenville, NC 27835       |   |                       |   |                        |
| (252) 355-4644             |   | 3635 North Halifax Road    |   |                        |
|                       |   | Rocky Mount, NC 27804      |   |                        |
| 1707 SE Greenville Blvd    |   | (252) 451-8700             |   |                        |
| Greenville, NC 27858       |   |                       |   |                        |
| (252)752-2770              |   |                       |   |                        |

| Member FDIC |   |
|-------------|--------|

----

| First South Bancorp, Inc.       | Telephone:  252-946-4178       |
|---------------------------------|------------------------------------------|
| 1311 Carolina Avenue            | Fax:  252-946-3873             |
| Washington, NC  27889 | E-mail:  info@firstsouthnc.com |
|                            | Website:  www.firstsouthnc.com |

| Quarter Ended      |   | High   |   |   | Low    |   |   | Dividends |   |
|--------------------|--------|--------|--------|--------|--------|--------|--------|-----------|--------|
| March 31, 2010     |   | $      | 14.00  |   |   | $      | 9.74   |      |   | $ | .20 |   |
| June 30, 2010      |   |   | 14.87  |   |   |   | 10.61  |      |   |   | .20 |   |
| September 30, 2010 |   |   | 12.01  |   |   |   | 9.42   |      |   |   | .09 |   |
| December 31, 2010  |   |   | 10.49  |   |   |   | 5.91   |      |   |   | .00 |   |
|               |   |   |   |   |   |   |   |      |   |   |   |   |
| March 31, 2009     |   | $      | 13.15  |   |   | $      | 5.80   |      |   | $ | .20 |   |
| June 30, 2009      |   |   | 12.69  |   |   |   | 9.00   |      |   |   | .20 |   |
| September 30, 2009 |   |   | 13.90  |   |   |   | 11.00  |      |   |   | .20 |   |
| December 31, 2009  |   |   | 11.95  |   |   |   | 9.88   |      |   |   | .20 |   |

| General Counsel                              | Special Counsel                   | Independent Accountants        |
|----------------------------------------------|-----------------------------------|--------------------------------|
| Rodman, Holscher, Francisco & Peck, P.A. | Gaeta & Eveson, P.A.          | Turlington and Company, L.L.P. |
| 320 North Market Street                      | 700 Spring Forest Road, Suite 335 | 509 East Center Street         |
| Washington, NC  27889              | Raleigh, NC 27609                 | Lexington, NC 27292            |

----

|                     |   | 12/31/05 |   |   | 12/31/06 |   |   | 12/31/07 |   |   | 12/31/08 |   |   | 12/31/09 |   |   | 12/31/10 |   |
|--------------------------|--------|----------|--------|--------|----------|--------|--------|----------|--------|--------|----------|--------|--------|----------|--------|--------|----------|--------|
| First South Bancorp Inc. |   | $        | 100.00 |   |     | $      | 138.52 |     |   | $      | 98.83    |   |   | $        | 58.46  |   |     | $      | 51.28 |   |   | $ | 34.28 |   |
| NASDAQ                   |   | $        | 100.00 |   |     | $      | 111.74 |     |   | $      | 124.67   |   |   | $        | 73.77  |   |     | $      | 107.12 |   |   | $ | 125.93 |   |
| NASDAQ Bank              |   | $        | 100.00 |   |     | $      | 114.45 |     |   | $      | 88.71    |   |   | $        | 71.34  |   |     | $      | 62.32 |   |   | $ | 75.34 |   |

----

| First South Bancorp |
|---------------------|

----