UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
DC  20549
 
 FORM
10-K/A
 x
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 For the
fiscal year ended December 31, 2008
 OR
  ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 For the
transition period from _________ to _________
 
 Commission
File No.  0-22219
 
 FIRST SOUTH BANCORP,
INC.
 (Exact
name of registrant as specified in its charter)
 
 Virginia
                    
                    56-1999749(State
      or other jurisdiction of
                    
                    (I.R.S.
      Employerincorporation
      or organization)
                    
                    Identification
      No.)1311 Carolina Avenue, Washington, North
      Carolina
                    
                    27889-2047(Address
      of principal executive offices)
                    
                    (Zip
      Code)
 
 Registrant’s
telephone number, including area code:  (252)
946-4178
 
 Securities
registered pursuant to Section 12(b) of the Act:
 
 Common Stock (par value $0.01 per
      share)
                    
                    NASDAQ Global Select
  Market(Title
      of Class)
                    
                    (Name
      of exchange onwhich
      registered)
 
 Securities
registered pursuant to Section 12(g) of the Act:None
 
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes  ̈   No
x
 
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes  ̈   No
x
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.   Yes x   No
 ̈
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  x
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act  (Check one):
 
 Large
      accelerated filer  ̈
                    Accelerated
      filer xNon-accelerated
      filer  ̈ (Do
      not check if a smaller reporting company)
                    Smaller
      reporting company  ̈
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).  Yes  ̈   No
x
 
 The
aggregate market value of common stock held by nonaffiliates of the registrant
at June 30, 2008, was approximately $103.8 million based on the closing sale
price of the registrant’s Common Stock as listed on the Nasdaq Global Select
Market as of the last business day of the registrant’s most recently completed
second fiscal quarter.  For purposes of this calculation, it is
assumed that directors, executive officers and beneficial owners of more than 5%
of the registrant’s outstanding voting stock are affiliates.
 
 Number of
shares of Common Stock outstanding as of March 10, 2009:
9,738,096.
  
  Explanatory
Note
 
 First South Bancorp, Inc. (the
“Company”) is filing this Amendment No. 1 to its Annual Report on Form 10-K for
the year ended December 31, 2008, solely to include certain disclosure
originally intended to be incorporated by reference from the definitive proxy
statement for the Company’s 2009 Annual Meeting of Stockholders (the “Proxy
Statement”) pursuant to General Instruction G(3) of Form 10-K.
 
 The Company is not amending or
restating its financial results as originally reported in its Annual Report on
Form 10-K for the fiscal year ended December 31, 2008.
 
 This Amendment No. 1 to the Company’s
Annual Report on Form 10-K for the fiscal year end December 31, 2008, amends and
supersedes the following items in their entirety as set forth
below:  Items 10, 11, 12, 13, 14 of Part III of the Company’s Annual
Report on Form 10-K filed with the Securities and Exchange Commission on March
11, 2009.
 
 PART
III
 
 Item
10.Directors,
Executive Officers and Corporate Governance
 
 General
 
 The Board
currently consists of seven members. The Company’s Articles of Incorporation
require that directors be divided into three classes, as nearly equal in number
as possible, with approximately one-third of the directors elected each
year.  At the Annual Meeting, two directors will be elected for terms
expiring at the 2012 Annual Meeting.  The Board has nominated Frederick N. Holscher and
Frederick H. Howdy to
serve as directors for a three-year period.  Both nominees are
currently members of the Board.  Under Virginia law and the Company’s
Bylaws, directors are elected by a plurality of the votes present in person or
by proxy at a meeting at which a quorum is present.  It is intended
that the persons named in the proxies solicited by the Board for the 2009 Annual
Meeting will vote for the election of the named nominees.  If any
nominee is unable to serve, the shares represented by all valid proxies will be
voted for the election of such substitute as the Board may recommend or the size
of the Board may be reduced to eliminate the vacancy.  At this time,
the Board knows of no reason why any nominee might be unavailable to
serve.
 
 The
following table sets forth, for each nominee for director and continuing
director of the Company, his age, the year he first became a director of the
Company and the expiration of his term as a director.  Each director
of the Company also is a member of the Board of Directors of the Bank. All of
the directors are independent under the current listing standards of the NASDAQ
Stock Market, except for Mr. Vann because he is an employee of the Company
and First South Bank (the “Bank”).  In determining the independence of
the directors, the Board also considers transactions, relationships or
arrangements between the Company, the Bank and its directors that are not
required to be disclosed in the Company’s proxy statement or pursuant to Item 13
of this Annual Report on Form 10-K.
 
 Name
                  
                  Age at
                    December 31,
                    2008
                  
                  Year first
                    Elected
                    as Director of
                    the Company
                  
                  Current Term
                    to Expire
                  
                  Position(s)
                    HeldBOARD
      NOMINEES FOR TERMS TO EXPIRE IN 2012Frederick
      N. Holscher
                  
                  60
                  
                  1996
                  
                  2009
                  
                  DirectorFrederick
      H. Howdy
                  
                  77
                  
                  1996
                  
                  2009
                  
                  DirectorDIRECTORS
      CONTINUING IN OFFICELinley
      H. Gibbs, Jr.
                  
                  77
                  
                  1996
                  
                  2010
                  
                  DirectorThomas
      A. Vann
                  
                  59
                  
                  1996
                  
                  2010
                  
                  Director,
      President and
                    Chief
      Executive OfficerCharles
      E. Parker, Jr.
                  
                  72
                  
                  1996
                  
                  2011
                  
                  DirectorMarshall
      T. Singleton
                  
                  69
                  
                  1996
                  
                  2011
                  
                  DirectorH.D.
      Reaves, Jr.
                  
                  71
                  
                  1996
                  
                  2011
                  
                  Director
  2
  Set forth
below is information concerning the Company’s directors.  Unless
otherwise stated, all directors have hel d the
positions indicated for at least the past five years.
 
 Frederick N. Holscher is a
partner with the Washington, North Carolina law firm of Rodman, Holscher,
Francisco & Peck, P.A. and has been with the firm since 1973. He has been a
director of the Bank since 1985.
 
 Frederick H. Howdy is
President of Drs. Freshwater and Howdy P.A., a dental health care corporation of
North Carolina.  Prior to that, he was a dentist in Washington, North
Carolina for 36 years. He has been a director of the Bank since
1975.
 
 Linley H. Gibbs, Jr. has been
retired since 1992.  Prior to his retirement, Mr. Gibbs served as a
general manager with Hamilton Beach, an appliance manufacturing company in
Washington, North Carolina. He has been a director of the Bank since
1985.
 
 Thomas A. Vann serves as
President and Chief Executive Officer of the Company and the Bank.  He
joined the Bank in 1972 as Assistant Manager.  Mr. Vann was promoted
to a number of positions prior to becoming President of the Bank in 1977 and
Chief Executive Officer in 2000. He has been a director of the Bank since
1979.
 
 Charles E. Parker, Jr. is
Senior Vice President of the Robinson and Stith Insurance Agency in New Bern,
North Carolina.  He joined the agency in 1989. He has been a director
of the Bank since 1971.
 
 Marshall T. Singleton has been
a co-owner of B.E. Singleton & Sons since 1960, a highway construction firm
in Washington, North Carolina. He has been a director of the Bank since
1990.
 
 H.D. Reaves, Jr.was employed
with Home Federal Savings and Loan Association, Fayetteville, North Carolina,
from 1962 to November 1999 and served as Home Federal’s President and Chief
Executive Officer from 1992 to 1999. He has been a director of the Bank since
1999.
 
 Executive
Officers Who Are Not Directors
 
 The
following sets forth information with respect to executive officers who do not
serve on the Board of Directors.
 Age
      atDecember
      31,Name
                
                2008
                
                Title (1)William
      L. Wall
                
                62
                
                Executive
      Vice President, Chief Financial Officer and
                  Secretary
      of the Company and the BankJ.
      Randy Woodson
                
                47
                
                Executive
      Vice President and Chief Operating OfficerPaul
      S. Jaber
                
                52
                
                Executive
      Vice President of Mortgage LendingJohn
      F. Nicholson, Jr.
                
                57
                
                Executive
      Vice President of Credit Administration and
                  Chief
      Credit OfficerMary
      R. Boyd
                
                58
                
                Executive
      Vice President of Loan ServicingSherry
      L. Correll
                
                54
                
                Executive
      Vice President of Bank OperationsKristie
      W. Hawkins
                
                43
                
                Treasurer
      and Controller of the Company and the
Bank
  
 (1)
              All
      positions are with the Bank unless indicated
  otherwise.
 
 William L. Wall joined the
Bank in 1993 and currently serves as Executive Vice President, Chief Financial
Officer and Secretary of the Company and the Bank.  Prior to joining
the Bank, Mr. Wall served as Senior Vice President, Treasurer and Chief
Financial Officer of Pioneer Savings Bank in Rocky Mount, North
Carolina.
 
 J. Randy Woodsonjoined the
Bank in 2008 and currently serves as Executive Vice President and Chief
Operating Officer.  Prior to joining the Bank, Mr. Woodson was
employed with Crestar Bank from 1984 to 1998 in various commercial loan
capacities.  Mr. Woodson joined Valley Bank of Roanoke, Virginia in
1998 as Senior Loan Officer and served as Chief Lending Officer from 2000 to
2005 and most recently served with Valley Bank as Executive Vice President and
Chief Operating Officer from 2005 to 2007.
  3
 
 Paul S. Jaber joined the Bank
in 2002 and currently serves as Executive Vice President of Mortgage
Operations.  Prior to joining the Bank, Mr. Jaber served as Senior
Vice President of Mortgage Lending of Triangle Bank in Raleigh, North Carolina
from 1999 to 2001, and as Senior Vice President of Mortgage Lending of United
Federal Savings Bank of Rocky Mount, North Carolina from 1979 to
1999.
 
 John F. Nicholson, Jr., joined
the Bank in 2006 as Senior Vice President and Credit Risk Manager and became
Executive Vice President and Chief Credit Officer in 2008.  Prior to
joining the Bank, Mr. Nicholson served as a Senior Business Intermediary from
2001 to 2006 with C. J. Harris & Company. Prior to that, Mr. Nicholson had
twenty three years banking experience in various credit administration
capacities with Wachovia Bank and United Carolina Bank. Most recently he served
as Senior Vice President and Senior Credit Administrator with United Carolina
Bank in Raleigh, North Carolina.
 
 Mary R. Boyd
joined  the Bank in 1983 and currently serves as Executive Vice
President of Loan Servicing.
 
 Sherry L. Correll joined the
Bank in 1985 and currently serves as Executive Vice President of Bank
Operations.  Prior to 2008, she served as Executive Vice President of
Deposit Operations.
 
 Kristie W. Hawkins joined the
Bank in 1982.  Prior to her current position of Controller and
Treasurer, she served as the Bank’s Assistant Treasurer and Assistant Secretary
as well as accounting department supervisor.
 
 Committees
of the Board of Directors
 
 The Board
meets monthly and may have additional special meetings.  During the
year ended December 31, 2008, the Board met 12 times.  No director
attended fewer than 75% in the aggregate of the total number of Company Board of
Directors meetings held during the year ended December 31, 2008 and the total
number of meetings held by committees on which he served during such fiscal
year.
 
 The
Company has a separately designated Audit Committee established in accordance
with Section 3(a)(58)(A) of the Exchange Act.  The Audit Committee
consists of Directors Parker, Reaves and Singleton, who currently serves as
Chairperson. The members of the Audit Committee are “independent,” as
“independent” is defined in Rule 4200(a)(15) of the National Association of
Securities Dealers (“NASD”) listing standards. The function of the Audit
Committee is to examine and approve the audit report prepared by the independent
auditors of the Company, to select the independent auditors to be engaged by the
Company and to review and approve audit policies. The Company’s Board of
Directors has determined that one member of the Audit Committee, H.D. Reaves,
Jr., qualifies as an “audit committee financial expert” as defined in Item
407(d)(5)(ii) of Regulation S-K promulgated by the Securities and Exchange
Commission. Director Reaves is “independent,” as such term is defined in Rule
4200(a)(15) of the NASD listing standards. The Board has adopted a written
charter for the Audit Committee. A copy of the Audit Committee Charter is
available on the Company’s Internet website located at www.firstsouthnc.com. The
Audit Committee met 5 times during the year ended December 31,
2008.
 
 The
Board’s Executive Committee consists of Directors Gibbs, Howdy, Vann and
Holscher, who currently serves as Chairperson.  The Executive
Committee is authorized, between meetings of the Board, to perform all duties
and exercise all authority of the Board, except those duties and authorities
delegated to other committees of the Board, and its primary function is to
consider matters that require immediate attention. The Executive Committee met
11 times during the year ended December 31, 2008.
 
 The Board
has a Nominating Committee currently consisting of Directors Parker, Singleton
and Gibbs, who currently serves as Chairperson. The Nominating Committee
nominates persons for election as directors at the Company’s Annual Meeting. The
members of the Nominating Committee are “independent directors” as defined in
NASDAQ listing standards. The Board has adopted a Charter for the Nominating
Committee.  The Nominating Committee Charter is available on the
Company’s Internet website located at www.firstsouthnc.com. The
Nominating Committee met once during the year ended December 31,
2008.
  4
  In its
deliberations, the Nominating Committee considers the candidate’s personal and
professional integrity, knowledge of the banking business and involvement in
community, business and civic affairs, and also considers whether the candidate
would provide for adequate representation of the Bank’s market area. Any nominee
for director made by the Nominating Committee must be highly qualified with
regard to some or all the attributes listed in the preceding sentence. In
searching for qualified director candidates to fill vacancies, the Nominating
Committee solicits the Company’s then current directors for the names of
potential qualified candidates. Moreover, the Nominating Committee may ask the
Company’s directors to pursue their own business contacts for the names of
potentially qualified candidates. The Nominating Committee would then consider
the potential pool of director candidates, select the top candidate based on the
candidates’ qualifications and the Board’s needs, and conduct a thorough
investigation of the proposed candidate’s background to ensure there is no past
history that would cause the candidate not to be qualified to serve as a
director of the Company. The Nominating Committee will consider director
candidates recommended by stockholders. Any stockholder wishing to recommend a
candidate for consideration by the Nominating Committee as a possible director
nominee for election at an upcoming annual meeting of stockholders must provide
written notice to the Nominating Committee of such stockholder’s recommendation
of a director nominee no later than December 31 of the year preceding the annual
meeting of stockholders. Notice should be provided to: Corporate Secretary,
First South Bancorp, Inc., 1311 Carolina Avenue, Washington, North Carolina
27889. In the event a stockholder has submitted a proposed nominee, the
Nominating Committee would consider the proposed nominee, along with any other
proposed nominees recommended by individual directors, in the same manner in
which the Nominating Committee would evaluate nominees for director recommended
by directors.
 
 The Board
has a Compensation Committee currently consisting of Directors Gibbs, Holscher
and Howdy. The Compensation Committee develops the broad outline of the
compensation program and monitors the success of the program in achieving the
objectives of the Company’s compensation philosophy. The Compensation Committee
is also responsible for the administration of all compensation programs and
policies, including the administration of both cash and stock-based incentive
programs.
 
 The
Compensation Committee operates under a written charter that establishes the
Compensation Committee’s responsibilities. The Compensation Committee and the
Board of Directors review the Charter periodically to ensure that the scope of
the Charter is consistent with the Compensation Committee’s expected role. Under
the Charter, the Compensation Committee is charged with general responsibility
for the oversight and administration of our compensation program. The Charter
vests in the Compensation Committee principal responsibility for determining the
compensation of the Chief Executive Officer based on the Compensation
Committee’s evaluation of his performance. The Charter also authorizes the
Compensation Committee to engage consultants and other professionals without
management approval to the extent deemed necessary to discharge its
responsibilities. The Compensation Committee Charter is available on the
Company’s Internet website located at www.firstsouthnc.com.  The
Compensation Committee met three times during the year ended December 31, 2008,
including one executive session attended by Committee members only.
 
 Board Policies
Regarding Communications with the Board of Directors and Attendance at Annual
Meetings
 
 The Board
maintains a process for stockholders to communicate with the Board. Stockholders
wishing to communicate with the Board of Directors should send any communication
to William L. Wall, Secretary, First South Bancorp, Inc., 1311 Carolina Avenue,
Washington, North Carolina 27889. Any such communication must state the number
of shares beneficially owned by the stockholder making the communication. Mr.
Wall will forward such communication to the full Board or to any individual
director or directors to whom the communication is directed unless the
communication is unduly hostile, threatening, illegal or similarly
inappropriate, in which case he has the authority to discard the communication
or take other appropriate action regarding the communication.
 
 The
Company’s policy is to strongly encourage Board member attendance at annual
meetings of stockholders.  All seven of the Company’s directors
attended the Company’s 2008 annual meeting of stockholders.
 
 Section
16(a) Beneficial Ownership Reporting Compliance
 
 Pursuant
to regulations promulgated under the Exchange Act, the Company’s officers and
directors and all persons who own more than 10% of the Common Stock (“Reporting
Persons”) are required to file reports detailing their ownership and changes of
ownership in the Common Stock and to furnish the Company with copies of all such
ownership reports that are filed.  Based solely on the Company’s
review of the copies of such ownership reports which it has received in the past
fiscal year or with respect to the past fiscal year, or written representations
that no annual report of changes in beneficial ownership were required, the
Company believes that during fiscal year 2008 all Reporting Persons have
complied with these reporting requirements.
  5
  Code
of Ethics
 
 The
Company has adopted a Code of Ethics that applies to the Company’s principal
executive officer, principal financial officer and principal accounting
officer.  The Company has posted such Code of Ethics on its Internet
website and intends to satisfy the disclosure requirement under Item 5.05 of
Form 8-K regarding an amendment to, or waiver from, the Code of Ethics by
posting such information on its Internet website.  The Company’s
Internet website may be accessed as follows:
http://www.firstsouthnc.com.
 
 Item
11.Executive
Compensation
 
 COMPENSATION
DISCUSSION AND ANALYSIS
 
 This
Compensation Discussion and Analysis explains the Company’s compensation
philosophy, policies and practices with respect to the chief executive officer,
chief financial officer, and the other three most highly-compensated executive
officers, which are collectively referred to as the “named executive
officers.”
 
 The
Objectives of the Executive Compensation Program
 
 The
Company’s compensation philosophy for named executive officers is founded upon
the premise that its success depends, in a large part on the dedication,
commitment and performance of the individuals placed in key management positions
to drive the overall performance of the Company.  In order to attract
and retain executives with the ability and the experience necessary to lead and
deliver strong performance to its shareholders, the Company strives to provide a
total compensation package that is competitive with its peers.
 
 Elements
Used to Implement Our Compensation Objectives
 
 The
following compensation elements are combined for each named executive officer in
a manner to optimize the executive’s contribution to the Company:
 •
              Base
      Salary
 •
              Short-term
      Bonus Plan
 •
              Long-term
      Equity Incentive Plan
 •
              Supplemental
      Income Agreements
 •
              Employment
      and Change-in-Control Protective
Agreements
 
 Base Salary.The
Base Salary program is designed to provide a competitive base salary to
management and employees.  The salary levels of all employees,
including executive officers, are set to reflect the duties and levels of
responsibilities inherent in the position and the competitive conditions in the
banking business in our market area. Comparative salaries paid by peer financial
institutions are considered in establishing the salary for a given position. The
Compensation Committee utilizes surveys prepared by trade groups and other
independent sources of salaries paid to executive officers of other bank holding
companies, non-diversified banks and other financial institutions similar in
size, market capitalization and other characteristics. Base salaries for
executive officers are reviewed annually by the Compensation Committee, taking
into account the competitive level of pay as reflected in the surveys consulted.
See “–Peer Group
Analysis”.  In setting base salaries, the Compensation
Committee also considers a number of factors relating to the particular
executives, including individual performance, job responsibilities, level of
experience, ability and knowledge of the position and complexity of the
Company’s operations. These factors are considered subjectively and none of the
factors are accorded a specific weight. See “Executive Compensation – Summary
Compensation Table” for salaries paid to named executive officers in
2008.
 
 Short-Term Bonus
Plan.  The short-term bonus program is a cash-based plan that
is designed to reward the attainment of annual company-wide financial objectives
at specified levels and individual performance relative to the specific tasks an
officer is expected to accomplish during the year. The Compensation Committee,
in connection with its annual performance review of the named executive
officers, considers making discretionary bonus awards under this program. See
“Executive Compensation –
Summary Compensation Table” for the bonuses paid to named executive
officers in 2008.
  6
  Long-Term Equity Incentive
Compensation Program.  The long-term incentive compensation
plan is based on the granting of stock options to the named executive officers.
The Compensation Committee believes that stock options help retain high level
executives and ties the compensation of those executives to the creation of
long-term value for our stockholders. By increasing the equity holdings of the
management team, they are provided with a continuing stake in the Company’s
long-term success. The Compensation Committee believes that stock options are an
important element of the overall compensation philosophy, as they provide named
executive officers with incentives linked to the performance of our common
stock. The amount and terms of our stock option grants are based on a number of
factors including awards made to those holding comparable positions in our peer
group, tax and accounting treatment of stock options and the performance of the
executive receiving a stock option grant. See “Executive Compensation – Grants of
Plan Based Awards” for a list of the stock option grants made to our
named executive officers in 2008.
 
 Supplemental
Income Agreements.  The Company has entered into supplemental
income agreements with the chief executive officer and the chief financial
officer to provide these executives with supplemental retirement
benefits.  These arrangements are typical amongst our peers and are
utilized as a retention tool. See “Executive Compensation—Pension
Benefits” for a detailed description of the supplemental income
agreements.
 
 Employment and Change-in-Control
Protective Agreements.The Compensation Committee recognizes
that an important consideration in its ability to attract and retain key
personnel is the ability to minimize the impact on management of the possible
disruption associated with our analysis of strategic opportunities. Accordingly,
the Compensation Committee believes that it is in the Company’s best interests
to provide key personnel with reasonable financial arrangements in the event of
termination of employment following a change in control or involuntary
termination of employment for reasons other than cause.  Therefore, we
currently maintain an employment agreement with the chief executive officer and
change-in-control protective agreements with the other named executive officers,
except for Mr. Nicholson. See “Executive Compensation—Potential
Post-Termination and Change in Control Benefits” for a discussion of
these benefits and estimated payments under the agreements.
 
 Role
of Compensation Committee
 
 The
Compensation Committee is responsible for establishing and administering
policies governing the compensation for named executive officers. The
Compensation Committee operates under a written charter that establishes the
Committee’s responsibilities. The Committee and the Board of Directors review
the charter annually to ensure the scope of the charter is consistent with the
Committee’s expected role.
 
 The
Compensation Committee meets outside the presence of all executive officers,
including the named executive officers, to consider appropriate compensation for
the chief executive officer. The Compensation Committee analyzes the chief
executive officer’s performance annually and determines his base salary, annual
performance bonus payments and any stock option grants based on its assessment
of his performance. The Committee also takes into consideration the
recommendations of the chief executive officer when determining the payments to
be made to our other named executive officers under our discretionary bonus plan
and stock option plan.
 
 During
2008, the Compensation Committee met three times, including one executive
session attended by Committee members only.  The members of the
Compensation Committee are: Linley H. Gibbs, Jr., Frederick N. Holscher and
Frederick H. Howdy.
 
 Role
of Management
 
 The chief
executive officer reviews each other named executive officer's performance
annually, and based upon guidelines established by the Compensation Committee,
determines the appropriate base salary for each named executive officer. The
chief executive officer also makes recommendations to the Compensation Committee
with respect to annual discretionary bonus payments and the grants of
stock-based compensation awards for each named executive officer, excluding
himself.
 
 Peer
Group Analysis
 
 The
Compensation Committee benchmarks base salary and target incentive levels and
practices, as well as the Company’s performance results primarily in relation to
a peer group analysis.  As a participant in the annual compensation
survey conducted by the North Carolina Bankers Association, the Committee
utilizes the survey data gathered by the North Carolina Bankers Association to
establish our peer group.  The institutions that participate in the
North Carolina Bankers Association survey are the same institutions that we
compete with for executive talent.  The companies in our peer group
are reviewed as needed in order to add or remove companies to ensure that our
peer group comparisons are meaningful.
  7
  For each
named executive officer, we consider the relevance of the peer group survey
data, as well as:
 •
              The
      business need for the executive officer's
  skills;
 •
              The
      contributions that the executive officer has made or will make to the
      Company’s success;
 •
              The
      transferability of the executive officer's managerial skills to other
      potential employers; and
 •
              The
      relevance of the executive officer's experience to other potential
      employers.
 
 Tax
and Accounting Considerations
 
 In
consultation with the Company’s tax and accounting advisors, the Compensation
Committee evaluates the tax and accounting treatment of each compensation
program at the time of adoption, and on an annual basis to ensure a complete
understanding of the financial impact of each program. The analysis includes a
detailed review of recently adopted and pending changes in tax and accounting
requirements. As part of the review, the Committee considers modifications
and/or alternatives to existing programs to take advantage of favorable changes
in the tax or accounting environment or to avoid adverse
consequences.
 
 Retirement
Benefits; Employee Welfare Benefits
 
 The Bank
has a defined contribution 401(k) plan for eligible employees. The plan is
intended to provide employees increased retirement security on a tax advantaged
basis. The Bank matches 100% of employee contributions, with a maximum matching
contribution of up to 5% of the employee’s salary. The Bank’s contribution vests
over a 6-year graded vesting schedule. In addition to the 401(k) Plan, employees
are provided with coverage under medical, life insurance and disability plans on
terms consistent with industry practice. Other coverage such as dental, cancer,
and intensive care insurance is available to employees on a voluntary basis.
Employees are provided with access to a flexible spending plan to pay their
share of the cost of such coverage on a pre-tax basis.
 
 Perquisites
 
 The named
executive officers are provided perquisites that further their ability to
promote the Company’s business interests in our markets and to reflect
competitive practices for similarly-situated officers employed by our peers.
These perquisites are reviewed periodically and adjustments to them are made as
necessary.
 
 Stock
Compensation Grant and Award Practices
 
 The
Compensation Committee considers whether to make stock option grants and/or
award other forms of equity on an annual basis, typically in conjunction with
the annual performance reviews of the named executive officers. However, grants
or awards may be made at other times during the year based on specific
circumstances such as a new hire, a specific contractual commitment or a change
in position or responsibility. The Committee considers the recommendations of
our chief executive officer and our other named executive officers with respect
to awards contemplated for their subordinates. The Compensation Committee
recommends stock option grants to the Board of Directors. The Board then
approves the Committee’s recommendations and the option grants are normally
effective as of the specific day of the month on which the grants were approved
by the Board.
 
 As a
general matter, the Compensation Committee’s process is independent of any
consideration of the timing of the release of material nonpublic information,
including with respect to the determination of grant dates or the stock option
exercise prices. Similarly, the Company has never timed the release of material
nonpublic information with the purpose or intent to affect the value of
executive compensation. In general, the release of such information reflects
long-established timetables for the disclosure of material nonpublic information
such as earnings reports or, with respect to other events reportable under
federal securities laws, the applicable requirements of such laws with respect
to timing of disclosure.
 
 The
exercise price for stock option grants is based solely by reference to the
applicable provisions of our stock based compensation plans. Under the current
equity incentive plan,  the exercise price of a stock option is equal
to the closing sales price of the Company’s common stock on the NASDAQ Global
Select Market as of the effective date of the stock option
grant.
  8
 
 Stock
Ownership Requirements
 
 The
Companyhas
not adopted formal stock ownership requirements for the named executive officers
and members of the Board of Directors. As a practical matter, the named
executive officers and directors hold significant interests in the Company’s
common stock, which they have accumulated through individual purchases and
participation in stock compensation programs. See the “Voting Securities and Security
Ownership” section in this Proxy Statement.
 
 Compensation
for the Named Executive Officers in 2008
 
 Chief Executive Officer
Compensation.  In determining Mr. Vann’s compensation, the
Compensation Committee conducted a performance appraisal that reviewed Mr.
Vann’s financial, strategic and operational achievements.  In its
review, the Committee considered Mr. Vann’s personal leadership and
accomplishments, in connection with the Company’s overall performance and
success in meeting strategic objectives.  These factors were
considered in conjunction with the Company’s financial results in relation to
the established Business Plan, and achieving certain annual performance goals,
including, but not limited to satisfactory results of regulatory examinations,
Sarbanes-Oxley internal control compliance and independent audits.
 
 The
Compensation Committee’s assessment of Mr. Vann’s overall performance during
2008 concluded that he achieved all defined strategic and operational
objectives.  The Committee believes Mr. Vann’s compensation is
consistent with its objective to reward, align, motivate and challenge Mr. Vann
to continue to lead the Company successfully; however, Mr. Vann voluntarily
declined to accept a 2008 bonus, and requested that his 2009 base salary remain
the same as his 2008 salary base. See “Executive Compensation—Employment
Agreements” for Mr. Vann’s current base salary.
 
 Compensation for Named Executive
Officers.  In determining compensation for Messrs. Wall,
Woodson, Jaber and Nicholson, the Compensation Committee reviewed the 2008
performance appraisals presented by the chief executive officer and the salary
and bonus recommendations.  In December 2008, the Compensation
Committee accepted the recommendations as presented. Mr. Nicholson’s 2009 base
salary was increased by 3.92% to $132,500, effective January 1, 2009. The 2009
base salaries for Messrs. Wall, Woodson, and Jaber will remain the same as their
2008 base salaries. The Board of Directors awarded Messrs. Wall, Woodson, Jaber
and Nicholson a 2008 cash bonus of $12,000, $25,000, $8,500 and $18,000,
respectively. The Board of Directors also renewed each of the change in control
protective agreements for Messrs. Wall, Woodson, and Jaber for an additional
year. In terms of equity incentive compensation, the Compensation Committee
rewarded Messrs. Woodson and Nicholson for achieving certain job-related goals
by granting stock options to each of these executives.  See “Executive Compensation—Grants of
Plan-Based Awards” for information on these grants.  The
Compensation Committee believes that the compensation for other named executive
officers is consistent with its compensation objectives.
 
 Summary
Compensation Table
 
 The
following information is furnished for all individuals serving as the principal
executive officer or principal financial officer of the Company, the other most
highly compensated executive officers of the Company who received total
compensation of $100,000 or more during the year ended December 31,
2008.
 
 Name and Principal Position
                                      
                                      Year
                                      
                                      Salary
                                        ($)
                                      
                                      
                                      Bonus
                                        ($)
                                      
                                      
                                      Option
                                        Awards
                                        ($)
                                      
                                      
                                      Change in
                                        Pension Value
                                        and
                                        Nonqualified
                                        Deferred
                                        Compensation
                                        Earnings(1)
                                        ($)
                                      
                                      
                                      All
                                        Other
                                        Compensation
                                        (2)(3)
                                        ($)
                                      
                                      
                                      Total
                                        ($)Thomas
      A. Vann
                                      
                                      2008
                                      
                                      $
                                      465,000
                                      
                                      
                                      $
                                      –
                                      
                                      
                                      $
                                      –
                                      
                                      
                                      $
                                      116,089
                                      
                                      
                                      $
                                      52,093
                                      
                                      
                                      $
                                      633,182President
      and Chief Executive Officer
                                      
                                      2007
                                      
                                      
                                      465,000
                                      
                                      
                                      
                                      290,000
                                      
                                      
                                      
                                      –
                                      
                                      
                                      
                                      106,729
                                      
                                      
                                      
                                      52,081
                                      
                                      
                                      
                                      913,810of
      the Company and the Bank
                                      
                                      2006
                                      
                                      
                                      415,000
                                      
                                      
                                      
                                      260,000
                                      
                                      
                                      
                                      –
                                      
                                      
                                      
                                      90,777
                                      
                                      
                                      
                                      48,603
                                      
                                      
                                      
                                      814,380William
      L. Wall
                                      
                                      2008
                                      
                                      
                                      135,000
                                      
                                      
                                      
                                      12,000
                                      
                                      
                                      
                                      6,859
                                      (4)
                                      
                                      
                                      10,051
                                      
                                      
                                      
                                      7,926
                                      
                                      
                                      
                                      171,836Executive
      Vice President-Chief
                                      
                                      2007
                                      
                                      
                                      125,000
                                      
                                      
                                      
                                      22,000
                                      
                                      
                                      
                                      3,483
                                      
                                      
                                      
                                      9,307
                                      
                                      
                                      
                                      7,926
                                      
                                      
                                      
                                      167,716Financial
      Officer and Secretary of the
                                      
                                      2006
                                      
                                      
                                      118,000
                                      
                                      
                                      
                                      20,000
                                      
                                      
                                      
                                      1,742
                                      
                                      
                                      
                                      8,618
                                      
                                      
                                      
                                      7,476
                                      
                                      
                                      
                                      155,836Company
      and the Bank
  9
 
 Name and Principal Position
                                                        
                                                        Year
                                                        
                                                        Salary
                                                          ($)
                                                        
                                                        
                                                        Bonus
                                                          ($)
                                                        
                                                        
                                                        Option
                                                          Awards
                                                          ($)
                                                        
                                                        
                                                        Change in
                                                          Pension Value
                                                          and
                                                          Nonqualified
                                                          Deferred
                                                          Compensation
                                                          Earnings(1)
                                                          ($)
                                                        
                                                        
                                                        All
                                                          Other
                                                          Compensation
                                                          (2)(3)
                                                          ($)
                                                        
                                                        
                                                        Total
                                                          ($)J.
      Randy Woodson
                                                        
                                                        2008
                                                        
                                                        
                                                        175,000
                                                        
                                                        
                                                        
                                                        25,000
                                                        
                                                        
                                                        
                                                        4,864
                                                        (5)
                                                        
                                                        
                                                        –
                                                        
                                                        
                                                        
                                                        6,071
                                                        
                                                        
                                                        
                                                        210,935Executive
      Vice President-Chief
                                                        
                                                        2007
                                                        
                                                        
                                                        –
                                                        
                                                        
                                                        
                                                        –
                                                        
                                                        
                                                        
                                                        –
                                                        
                                                        
                                                        
                                                        –
                                                        
                                                        
                                                        
                                                        –
                                                        
                                                        
                                                        
                                                        –Operating
      Officer of the Bank
                                                        
                                                        2006
                                                        
                                                        
                                                        –
                                                        
                                                        
                                                        
                                                        –
                                                        
                                                        
                                                        
                                                        –
                                                        
                                                        
                                                        
                                                        –
                                                        
                                                        
                                                        
                                                        –
                                                        
                                                        
                                                        
                                                        –Paul
      S. Jaber
                                                        
                                                        2008
                                                        
                                                        
                                                        137,000
                                                        
                                                        
                                                        
                                                        8,500
                                                        
                                                        
                                                        
                                                        512
                                                        (6)
                                                        
                                                        
                                                        –
                                                        
                                                        
                                                        
                                                        4,577
                                                        
                                                        
                                                        
                                                        150,589Executive
      Vice President-Mortgage
                                                        
                                                        2007
                                                        
                                                        
                                                        132,000
                                                        
                                                        
                                                        
                                                        12,500
                                                        
                                                        
                                                        
                                                        1,735
                                                        
                                                        
                                                        
                                                        –
                                                        
                                                        
                                                        
                                                        7,809
                                                        
                                                        
                                                        
                                                        154,044Operations
      of the Bank
                                                        
                                                        2006
                                                        
                                                        
                                                        127,000
                                                        
                                                        
                                                        
                                                        15,000
                                                        
                                                        
                                                        
                                                        1,735
                                                        
                                                        
                                                        
                                                        –
                                                        
                                                        
                                                        
                                                        6,124
                                                        
                                                        
                                                        
                                                        149,859John
      F. Nicholson, Jr.
                                                        
                                                        2008
                                                        
                                                        
                                                        127,500
                                                        
                                                        
                                                        
                                                        18,000
                                                        
                                                        
                                                        
                                                        2,343
                                                        (7)
                                                        
                                                        
                                                        –
                                                        
                                                        
                                                        
                                                        6,367
                                                        
                                                        
                                                        
                                                        154,210Executive
      Vice President – Credit
                                                        
                                                        2007
                                                        
                                                        
                                                        93,500
                                                        
                                                        
                                                        
                                                        2,000
                                                        
                                                        
                                                        
                                                        –
                                                        
                                                        
                                                        
                                                        –
                                                        
                                                        
                                                        
                                                        5,314
                                                        
                                                        
                                                        
                                                        100,814Administration
      and Chief Credit
                                                        
                                                        2006
                                                        
                                                        
                                                        38,333
                                                        
                                                        
                                                        
                                                        750
                                                        
                                                        
                                                        
                                                        –
                                                        
                                                        
                                                        
                                                        –
                                                        
                                                        
                                                        
                                                        819
                                                        
                                                        
                                                        
                                                        39,902Officer
      of the BankLarry
      W. Mallard (9)
                                                        
                                                        2008
                                                        
                                                        
                                                        138,831
                                                        
                                                        
                                                        
                                                        –
                                                        
                                                        
                                                        
                                                        6,261
                                                        (8)
                                                        
                                                        
                                                        –
                                                        
                                                        
                                                        
                                                        7,374
                                                        
                                                        
                                                        
                                                        152,466Executive
      Vice President-Chief
                                                        
                                                        2007
                                                        
                                                        
                                                        183,750
                                                        
                                                        
                                                        
                                                        27,500
                                                        
                                                        
                                                        
                                                        23,227
                                                        
                                                        
                                                        
                                                        –
                                                        
                                                        
                                                        
                                                        11,170
                                                        
                                                        
                                                        
                                                        245,647Operating
      Officer of the Bank
                                                        
                                                        2006
                                                        
                                                        
                                                        156,969
                                                        
                                                        
                                                        
                                                        24,000
                                                        
                                                        
                                                        
                                                        29,327
                                                        
                                                        
                                                        
                                                        –
                                                        
                                                        
                                                        
                                                        9,660
                                                        
                                                        
                                                        
                                                        219,956
  
 (1)
              Represents
      the aggregate change in the present value of the accumulated benefits
      under the Bank’s deferred compensation arrangements.  See “Executive Compensation –
      Pension Benefits” and Note 7 to the Notes to the Consolidated
      Financial Statements contained in the Company’s Annual Report on Form 10-K
      for the year ended December 31, 2008, for a discussion of the deferred
      compensation arrangements.
 (2)
              Executive
      officers of the Company and the Bank receive indirect compensation in the
      form of certain perquisites and other personal benefits.  The
      amount of such benefits received by any named executive officer in fiscal
      2008 did not exceed $10,000.
 (3)
              For
      all the named executive officers, except Mr. Vann, the amount shown
      consists of matching contributions under the Bank’s 401(k) Plan and life
      insurance premiums.  For Mr. Vann, the amount shown for 2008
      includes $9,717 in matching contributions under the Bank’s 401(k) Plan,
      $41,800 in Board of Directors and committee fees and $576 in life
      insurance premiums.
 (4)
              Reflects
      the dollar amount recognized for financial statement reporting purposes in
      accordance with FAS 123(R) in 2008, based upon a fair value of $3.07 and
      $6.97 for options granted in 2007 and 2006, respectively, using the
      Black-Scholes option pricing model.  See Note 8 to Consolidated
      Financial Statements contained in the Company’s Annual Report on
      Form 10-K for the year ended December 31, 2008 for a discussion
      of the option grants and
assumptions.
 (5)
              Reflects
      the dollar amount recognized for financial statement reporting purposes in
      accordance with FAS 123(R) in 2008, based upon a fair value of $2.60 and
      $2.52, respectively, for options granted in 2008 using the Black-Scholes
      option pricing model.  See Note 8 to Consolidated Financial
      Statements contained in the Company’s Annual Report on Form 10-K for
      the year ended December 31, 2008 for a discussion of the option
      grants and assumptions.
 (6)
              Reflects
      the dollar amount recognized for financial statement reporting purposes in
      accordance with FAS 123(R) in 2008, based upon a fair value of $3.07 for
      options granted in 2007 using the Black-Scholes option pricing model. See
      Note 8 to Consolidated Financial Statements contained in the Company’s
      Annual Report on Form 10-K for the year ended December 31, 2008
      for a discussion of the option grants and
  assumptions.
 (7)
              Reflects
      the dollar amount recognized for financial statement reporting purposes in
      accordance with FAS 123(R) in 2008, based upon a fair value of $2.01 for
      options granted in 2008 using the Black-Scholes option pricing
      model.  See Note 8 to Consolidated Financial Statements
      contained in the Company’s Annual Report on Form 10-K for the year
      ended December 31, 2008 for a discussion of the option grants and
      assumptions.
 (8)
              Reflects
      the dollar amount recognized for financial statement reporting purposes in
      accordance with FAS 123(R) in 2008, based upon a fair value of $4.52 and
      $7.34, respectively, for options granted in 2006 using the Black-Scholes
      option pricing model. See Note 8 to Consolidated Financial Statements
      contained in the Company’s Annual Report on Form 10-K for the year
      ended December 31, 2007 for a discussion of the option grants and
      assumptions.
 (9)
              Mr.
      Mallard resigned on September 4, 2008. Compensation table reflects salary
      from January 1, 2008 through September 4,
2008.
  10
 
 Grants
of Plan-Based Awards
 
 The
following table provides information concerning all award grants made to the
Company’s named executive officers in the 2008 fiscal year.
 
 Name
                            
                            Grant Date
                            
                            
                            All Other
                              Option Awards:
                              Number
                              of Securities
                              Underlying
                              Options (#)
                            
                            
                            Exercise or
                              Base Price of
                              Option
                              Awards
                              ($/Share)
                            
                            
                            Grant Date
                              Fair Value
                              of Stock
                              and Option
                              Awards (3)J.
      Randall Woodson
                            
                            1/24/08
                            
                            
                            
                            7,500
                            (1)
                            
                            $
                            21.41
                            
                            
                            $
                            18,900J.
      Randall Woodson
                            
                            9/30/08
                            
                            
                            
                            5,000
                            (2)
                            
                            
                            17.27
                            
                            
                            
                            13,013John
      F. Nicholson, Jr.
                            
                            5/31/08
                            
                            
                            
                            6,000
                            (2)
                            
                            
                            19.26
                            
                            
                            
                            12,050
  
 (1)
              The
      options vest at the rate of 20% on each of the first five anniversaries
      following the date of grant.  The options are forfeited in the
      event employment is terminated for cause or if an optionee resigns from
      employment and within 12 months thereafter becomes an employee,
      consultant, director or 10% or greater stockholder of a company that
      offers competing products within 50 miles of where any Company, Bank or
      affiliate is doing business.  Each option has a 10-year
      term.
 (2)
              The
      options vest at the rate of 33 1/3% on each of the first three
      anniversaries following the date of grant.  The options are
      forfeited in the event employment is terminated for cause or if an
      optionee resigns from employment and within 12 months thereafter becomes
      an employee, consultant, director or 10% or greater stockholder of a
      company that offers competing products within 50 miles of where any
      Company, Bank or affiliate is doing business.  Each option has a
      10-year term.
 (3)
              The
      grant date fair value of each option award in the table is computed in
      accordance with FAS 123R.  The fair value of each option
      granted to Messrs. Woodson and Nicholson  during 2008 was $2.52,
      $2.60 and $2.01, respectively, using the Black-Scholes option pricing
      model.  See Note 8 of “Notes to Consolidated Financial
      Statements” contained in the Company’s Annual Report on Form 10-K for the
      year ended December 31, 2008/
 
 Employment
Agreement.  The Company and the Bank maintain an employment
agreement with Thomas A. Vann, pursuant to which Mr. Vann serves as President of
the Bank and President of the Company. The employment agreement provides for a
term of thirty-six months. On each anniversary date of the employment agreement,
the term of Mr. Vann’s employment is automatically extended for an additional
one-year period beyond the then effective expiration date, unless the Company
and the Bank or Mr. Vann gives notice not later than 90 days prior to the
anniversary date of an intention that the employment agreement not be extended
beyond its then current term.  The current annual base salary under
Mr. Vann’s employment agreement is $465,000. The employment agreement provides
that Mr. Vann’s salary is reviewed at least annually. In addition to base
salary, the employment agreement provides for among other things the inclusion
in any discretionary bonus plans, retirement and medical plans,
customary fringe benefits, vacation and sick leave. The employment
agreement also provides Mr. Vann with certain benefits and payments upon
termination of employment. See “—Potential Post-Termination and
Change in Control Benefits—Employment
Agreement.”
  The employment agreement further
provides that to the maximum extent permitted under applicable law, during the
term of the employment agreement and for a period of six years thereafter, the
Company shall indemnify Mr. Vann against and hold him harmless from any costs,
liabilities, losses and exposures to the fullest extent and on the most
favorable terms and conditions that similar indemnification is offered to any
director or officer of the Company or any affiliate thereof. In addition, during
the term of the employment agreement and for a period of six years thereafter,
the Company shall cause Mr. Vann to be covered by and named as an insured under
any policy or contract of insurance obtained by either the Company or the Bank
to insure directors and officers against personal liability for acts or
omissions in connection with service as an officer or director of the Company or
any of its affiliates or service in other capacities at its request. In the
event that Mr. Vann prevails over the Company and the Bank, or obtains a written
settlement, in a legal dispute as to the employment agreement, he will be
reimbursed for his legal and other expenses related to the dispute.
 
 Change-in-Control Protective
Agreements.  The Company and the Bank currently maintain
change-in-control protective agreements with William L. Wall, J. Randall Woodson
and Paul S. Jaber, (individually, the “executive” and collectively, the
“executives”). The protective agreements for Messrs. Wall, Woodson and
Jaber terminate upon the earlier of (a) 12 months from the effective date of the
agreement, or (b) the date on which the executive terminates employment with the
Bank, provided that the rights under the protective agreements will continue
following termination of employment if the applicable protective agreement was
in effect at the date of the change in control. On each anniversary date of the
effective date of the protective agreement, the term of the protective agreement
may be extended for an additional one-year period beyond the then effective
expiration date, upon a determination by the Board of Directors that the
performance of the executive has met the required performance standards and that
such protective agreement should be extended. The protective agreements provide
Messrs. Wall, Woodson and Jaber with certain benefits and payments upon
termination of employment in connection with a “change in control” (as defined
in the agreements). See “—Potential Post-Termination and
Change in Control Benefits – Change in Control Protective
Agreements.”
  11
  Outstanding
Equity Awards at Fiscal Year-End
 
 The
following table provides information concerning unexercised options and stock
awards that have not vested for each named executive officer outstanding as of
December 31, 2008.
  Option AwardsName
                                  
                                  Number
                                    of
                                    Securities
                                    Underlying
                                    Unexercised
                                    Options
                                    (#)
                                    Exercisable
                                  
                                  
                                  Number of
                                    Securities
                                    Underlying
                                    Unexercised
                                    Options
                                    (#)
                                    Unexercisable
                                  
                                  
                                  Option
                                    Exercise
                                    Price
                                    ($)
                                  
                                  Option
                                    Expiration
                                    DateWilliam
      L. Wall
                                  
                                  
                                  1,000
                                  
                                  
                                  
                                  –
                                  
                                  
                                  $
                                  32.265
                                  
                                  7/31/161,000
                                  
                                  
                                  
                                  4,000
                                  (1)
                                  
                                  
                                  22.835
                                  
                                  12/31/17J.
      Randall Woodson
                                  
                                  
                                  –
                                  
                                  
                                  
                                  7,500
                                  (2)
                                  
                                  
                                  21.41
                                  
                                  1/24/18–
                                  
                                  
                                  
                                  5,000
                                  (3)
                                  
                                  
                                  17.27
                                  
                                  9/30/18Paul
      S. Jaber
                                  
                                  
                                  9,000
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  16.311
                                  
                                  7/8/12750
                                  
                                  
                                  
                                  –
                                  
                                  
                                  
                                  23.657
                                  
                                  12/31/15250
                                  
                                  
                                  
                                  250
                                  (4)
                                  
                                  
                                  22.835
                                  
                                  12/31/17John
      F. Nicholson, Jr.
                                  
                                  
                                  –
                                  
                                  
                                  
                                  6,000
                                  (5)
                                  
                                  
                                  19.26
                                  
                                  5/31/18
 
 (1)
              2,000
      options each vest on December 31, 2009 and 2010,
    respectively.
 (2)
              1,500
      options each vest on January 24, 2009, 2010, 2011, 2012 and 2013,
      respectively.
 (3)
              1,667
      options each vest on September 30, 2009 and 2010, respectively, and 1,666
      options vest on September 30, 2011.
 (4)
              250
      options vest on December 31, 2009.
 (5)
              2,000
      options each vest on May 31, 2009, 2010 and 2011,
      respectively.
 
 Stock
Option Exercises
 
 The
following table provides information concerning stock option exercises for each
named executive officer, on an aggregate basis, during 2008.
 
 Option AwardsName
                      
                      Number of Shares
                        Acquired On
                        Exercise (#)
                      
                      
                      Value Realized
                        On Exercise (1) ($)William
      L. Wall
                      
                      
                      6,750
                      
                      
                      $
                      101,810
  
 (1)
              Calculated
      based on the product of: (a) the number of shares acquired on exercise,
      and (b) the difference between the market price of the underlying Common
      Stock on the exercise date, determined based on the closing sale price on
      the exercise date, and the exercise price of the
  options.
  12
  Pension
Benefits
 
 The
following table provides information with respect to each plan that provides for
payments or benefits in connection with the retirement of a named executive
officer.  No payments were made during 2008.
 
 Name
                                                
                                                Plan Name
                                                
                                                Number of
                                                  Years
                                                  Credited
                                                  Service (#)
                                                
                                                
                                                Present
                                                  Value of
                                                  Accumulated
                                                  Benefit ($) (1)Thomas
      A. Vann
                                                
                                                Supplemental
      Income Agreement
                                                
                                                19
                                                
                                                
                                                $
                                                130,301Supplemental
      Income Plan Agreement
                                                
                                                14
                                                
                                                
                                                
                                                618,387Directors
      Deferred Compensation Plan Agreement
                                                
                                                14
                                                
                                                
                                                
                                                264,366Directors
      Deferred Retirement Plan Agreement
                                                
                                                14
                                                
                                                
                                                
                                                74,712Directors
      Retirement Payment Agreement
                                                
                                                24
                                                
                                                
                                                
                                                343,773William
      L. Wall
                                                
                                                Supplemental
      Income Plan Agreement
                                                
                                                13
                                                
                                                
                                                
                                                135,695
  
 (1)
              The
      accumulated benefits under the Bank’s deferred compensation arrangements
      are calculated in accordance with Accounting Principles Board No. 12, as
      amended by Statement of Financial Accounting Standards No. 106, using an
      8.00% discount rate.
 
 Supplemental Income
Agreement.The Bank maintains a supplemental income agreement
for Mr. Vann for the purpose of providing him with a fixed retirement benefit
over a specified term. See “–Potential Post-Termination and
Change in Control Benefits – Supplemental Income Agreement” for a
discussion of the benefits provided under the supplemental income
agreement.
 
 Supplemental Income Plan
Agreement.The Bank maintains supplemental income plan
agreements for Messrs. Vann and Wall for the purpose of providing these
executives with a fixed retirement benefit over a specified term.  See
“– Potential Post Termination
and Change in Control Benefits – Supplemental Income Plan Agreements” for
a discussion of the benefits provided under the supplemental income plan
agreements.
 
 Directors Deferred Compensation Plan
Agreements.  The Bank maintains directors’ deferred
compensation plan agreements for the benefit of Mr. Vann and certain other
directors.  The plan agreements provide each director with a fixed
retirement benefit over a specified term. See “Director Compensation– Directors’
Deferred Compensation Plan Agreements” for a discussion of the benefits
provided under the directors’ deferred compensation plan
agreements.
 
 Directors Deferred Retirement Plan
Agreements.The Bank maintains directors’ deferred retirement plan
agreements for the benefit of Mr. Vann and certain other directors. The plan
agreements provide each director with a fixed retirement benefit over a
specified term. See “Director
Compensation—Directors’
Deferred Retirement Plan Agreements” for a discussion of the benefits
provided under the directors’ deferred retirement plan agreements.
 
 Directors’ Retirement Payment
Agreements.The Bank maintains directors’ retirement payment
agreements for the benefit of Mr. Vann and certain other
directors.  The retirement payment agreements provide each director
with a fixed retirement benefit for a specified term. See “Director Compensation—Directors’ Retirement Payment
Agreements” for a discussion of the benefits provided under the
directors’ retirement payment agreements.
 
 Potential
Post-Termination and Change in Control Benefits
 
 As
described under our “Compensation Discussion and
Analysis,” we maintain certain arrangements with our named executive
officers that provide for termination and change in control benefits. The
information below describes and quantifies certain compensation that would
become payable under our existing plans and arrangements if a named executive
officer’s employment had terminated in connection with a change in control on
December 31, 2008, given the named executive officer’s compensation levels and,
if applicable, based on our stock price as of that date. These benefits are in
addition to benefits generally made available to our salaried employees, such as
accrued vacation and distributions from our tax-qualified
plans.
  13
 
 Employment
Agreement.Under our employment agreement with Mr. Vann, if
the Company or the Bank terminates Mr. Vann’s employment without Just Cause (as
defined in the employment agreement), or if Mr. Vann terminates his employment
for “Good Reason,” (as defined in the employment agreement) Mr. Vann will be
entitled to a payment equal to his remaining base salary due under the agreement
plus an additional 12 month’s salary. The employment agreement further provides
that upon Mr. Vann’s termination of employment for any reason other than Just
Cause, he and his spouse shall continue to participate in the Bank’s group
health insurance program for the remainder of their respective lives. The Bank
will, subject to provisions of the employment agreement covering termination
without Just Cause or for Good Reason and termination in connection with a
change in control, fund the cost of such continuation coverage on the same terms
as the Bank funded the cost of coverage for Mr. Vann and his spouse immediately
prior to his termination of employment (i.e., Mr. Vann will pay the
same dollar amount toward the premium costs as he paid immediately prior to his
termination of employment), and the Bank will fund the balance of such costs.
If, for any reason, Mr. Vann or his spouse cannot be continued under the Bank’s
group health insurance program, the Bank will reimburse Mr. Vann or his spouse
for the cost of any substitute coverage obtained by Mr. Vann or his spouse that
provides substantially similar benefits. Such reimbursement will be in an amount
determined by reference to the dollar amount paid by Mr. Vann immediately prior
to his termination of employment, with the remaining amount paid by the
Bank.
 
 The
employment agreement also provides Mr. Vann (or his beneficiary) with benefits
in the event he becomes disabled or dies while the agreement is in effect. If
Mr. Vann becomes disabled and is unable to work due to his Disability (as
defined in the employment agreement), Mr. Vann will be entitled to a
continuation of his salary and benefits for any period during the term of the
agreement and prior to the establishment of his Disability during which he is
unable to work, or any period of Disability which is prior to his termination of
employment, provided that any benefits paid under the Bank’s long-term
disability plan will continue as provided under the plan. In the event of Mr.
Vann’s death during the term of the employment agreement, his estate (or
beneficiary) will be entitled to receive his base salary in effect at the time
of his death through the last day of the calendar month in which he died. In the
event Mr. Vann voluntarily terminates his employment or he is terminated for
Just Cause, he is entitled to receive only his compensation, vested rights and
benefits up to the date of termination of employment.
 
 The
employment agreement also provides for a change in control severance benefit in
the event (i) Mr. Vann voluntarily terminates employment for any reason
within the 180-day period beginning on the date of a “change in control,” (as
defined in the employment agreement), (ii) Mr. Vann voluntarily terminates
employment within 90 days of an event that both occurs during the protected
period, which begins on the date six months before a change in control and ends
on the later of the second annual anniversary of the effective date of a change
in control or the expiration date of the employment agreement, including any
renewal terms and constitutes Good Reason (as defined on the employment
agreement), or (iii) the Company or Bank or their successor(s) in interest
terminate Mr. Vann’s employment without his written consent and for any reason
other than Just Cause during the protected period. In any such event, Mr. Vann
will be entitled to receive the
following payments and benefits: (i) a cash severance benefit equal to
three times his average annual compensation over the five most recently
completed taxable years preceding the effective date of the change in control;
(ii) for the first 36 months of Mr. Vann’s (and spouse’s) continued
participation in the Bank’s health insurance program which the Bank shall cover
the entire cost of such continued participation; and (iii) for a period of 36
months following Mr. Vann’s termination date, the Bank shall continue his
coverage under the Bank’s life, disability and other benefits that Mr. Vann
participated at his termination date.
  Under the
terms of the employment agreement, Mr. Vann is also entitled to receive a tax
indemnification payment if the payments and benefits under his employment
agreement or any other payments trigger liability under the Internal Revenue
Code of 1986, as amended (the “Code”), as an excise tax constituting “excess
parachute” payments. Under applicable law, the excise tax is triggered by change
in control related payments which equal or  exceed three times an
executive’s “base amount.” Base amount is defined as the average of an
executive’s Box 1 Form W-2 compensation for the five years preceding a change in
control. The excise tax equals 20% of the amount of the payment in excess of one
time the base amount.  The employment agreement has been amended to
comply with the requirements of, and will be administered in accordance with
Section 409A of the Code.  Payments and benefits provided under the
employment agreement are subject to certain restrictions imposed by Section
409A.
  14
  Change-in-Control Protective
Agreements.The protective agreements for Messrs. Woodson and
Jaber provide the executives with change in control severance benefits in the
event that (i) the executives voluntarily terminate employment within 90 days
after an event that occurs during the Protected Period (as defined below) and
that constitutes “Good Reason,” or (ii) the Bank, the Company or their
successors terminate the Executive’s employment during the Protected Period for
any reason other than for Just Cause (as defined in the
agreements).  Under such circumstances, Messrs. Woodson and Jaber
would be entitled to a payment equal to 1.0 times for Mr. Woodson and 1.5 times
for Mr. Jaber the executive’s annual base salary in effect six months before the
change in control occurred.  In no event, however, can the severance
benefit under the protective agreements exceed the difference between (i) the
executive’s Section 280G Maximum (i.e., 2.99 times each
executive’s base amount), and (ii) the sum of any other parachute payments, that
the executive receives on account of the change in control.  The
protected period is defined in the protective agreements as the period that
begins on the date that is six months before a change in control and ends on the
latter of the second anniversary of the change in control or the expiration date
of the applicable protective agreement. Under the terms of Mr. Wall’s
agreement, he will be entitled to a severance payment equal to 2.0 times his
base salary under the same circumstances as Messrs. Woodson and Jaber;
however, his payment will not be subject to the 280G Maximum, as his agreement
contains a tax indemnification provision.
  The protective agreements for
Messrs. Woodson and Jaber provide that within ten business days of a change
in control, the Bank shall fund a trust in the amount of the severance benefit
under the protective agreement, that will be used to pay amounts owed to the
executive under the protective agreement. The amount to be paid to
Mr. Wall’s severance benefits will be paid within 10 days of the event that
triggers payment under his agreement. In the event that an executive prevails
over the Company or the Bank in a legal dispute as to his protective agreement,
he will be reimbursed for his legal and other expenses related
thereto.
 
 In addition, if Mr. Wall’s employment
is terminated during the protected period following a change in control for any
reason other than Just Cause (as defined in his agreement), Mr. Wall and his
spouse will continue to participate in the Bank’s group health insurance program
for the remainder of their respective lives. The Bank (or its successor) will
fund the cost of such continuation coverage on the same terms as the Bank funded
the cost of coverage for the executive and his spouse immediately prior to his
termination of employment and the Bank will fund the balance of such costs. If,
for any reason, Mr. Wall or his spouse cannot be continued under the Bank’s
group health insurance program, the Bank (or its successor) will reimburse Mr.
Wall or his spouse for the cost of any substitute coverage obtained by Mr. Wall
or his spouse that provides substantially similar benefits.
 
 The protective agreements for
Messrs. Jaber and Wall have been amended to comply with the requirements
of, and will be administered in accordance with Section 409A of the
Code.  Mr. Woodson’s protective agreement was compliant with Section
409A when issued. Payments and benefits provided under the protective agreements
for Messrs. Woodson, Jaber and Wall are subject to certain restrictions
imposed by Section 409A.
 
 Supplemental Income
Agreement.The Bank maintains a supplemental income agreement
with Thomas A. Vann.  Upon the earlier of Mr. Vann’s (i) attainment of
age 65, or (ii) the date of Mr. Vann’s retirement before age 65, but after
attaining age 55 and completing at least 10 years of service with the Bank, the
Bank shall pay Mr. Vann an amount equal to $31,356 annually for a period of 15
years.
  In the event of Mr. Vann’s death after
becoming entitled to receive benefits under the supplemental income agreement,
but before any payments have been made, his beneficiary shall receive all
remaining payments.  In the event of Mr. Vann’s death prior to
attaining age 65, the Bank will pay his beneficiary $31,356 annually for 15
years.  In the event of Mr. Vann’s termination of employment by reason
other than death, retirement upon attaining age 65, or in the event of early
retirement, Mr. Vann (or his beneficiary) shall be entitled to receive, on the
earlier of his attainment of age 65 and his death, a percentage of his
benefit.  This percentage will be based on Mr. Vann’s full years of
service up to the date of his termination, beginning with 0% for less than 20
years of service, and increased in 5% increments (from 50% to 100%) for every
year of service thereafter, starting with 50% at 20 years of service up to 100%
for 29 years of service. In the event that Mr. Vann’s employment terminates for
any reason other than his death, or early retirement prior to the time he is
first entitled to receive payments under the agreement, Mr. Vann shall be
entitled to receive such percentages of his benefit, as discussed above, when he
reaches age 55 or on upon his death, whichever is earlier.  In the
event that a termination of protected employment (as defined in the agreements)
occurs (i) on or before age 65 or early retirement and (ii) following a “change
in control” (as defined in the agreement), then Mr. Vann shall be deemed to have
retired as of early retirement date. Said amount would be deposited in a grantor
trust within 10 days of the change in control. Mr. Vann is 100% vested in his
Supplemental Income Agreement benefit.  The supplemental income
agreement has been amended to comply with the requirements of, and will be
administered in accordance with Section 409A of the Code.  Payments
and benefits provided under the supplemental income agreement are subject to
certain restrictions imposed by Section 409A.
  15
  Supplemental Income Plan
Agreements.  The Bank maintains supplemental income plan
agreements with Thomas A. Vann and William L. Wall. Pursuant to the terms of the
agreement with Mr. Vann, if Mr. Vann retires from employment with the Bank
either at or after the age of 65 or at or after age 55 with at least 10 years of
service with the Bank, the Bank will pay, in equal monthly installments, a
minimum sum of $40,000 per annum for a period of 15 years. This amount will
increase by 5% for each full year of service completed by Mr. Vann after
January 1, 1994. If Mr. Vann remains employed by the Bank until age 65, he
will receive an annual benefit equal to $106,132 which will be payable over 15
years. Mr. Vann is 100% vested in his supplemental income plan agreement
benefit. Mr. Vann’s supplemental income plan agreement has been amended to
comply with the requirements of, and will be administered in accordance with
Section 409A of the Code.  Payments and benefits provided under the
supplemental income plan agreement are subject to certain restrictions imposed
by Section 409A.
 
 Pursuant to the terms of the Agreement
with Mr. Wall, if Mr. Wall retires from employment with the Bank either at or
after the age of 65 or on such earlier date as the Bank and Mr. Wall may agree,
the Bank will pay Mr. Wall a sum of $20,000 per annum for a period of 15
years in equal monthly installments, amounting to total payments of
$300,000.  Mr. Wall is 100% vested in his supplemental income plan
agreement. Mr. Wall’s supplemental income plan agreement has been amended to
comply with the requirements of, and will be administered in accordance with
Section 409A of the Code.  Payments and benefits provided under the
supplemental income plan agreement are subject to certain restrictions imposed
by Section 409A.
 
 In the event of Mr. Vann’s or Mr.
Wall’s death before age 65 or on their early retirement date, the Bank will make
payments to Mr. Vann’s or Mr. Wall’s beneficiaries in the same manner as if he
had retired. In the event that Mr. Vann terminates his service for reasons other
than (i) his retirement on his early retirement date, (ii) a change in control,
(iii) “termination of protected employment” (as defined below), or (iv) his
death, and the termination occurs before he is entitled to receive payments, he
will be entitled to receive a percentage of his benefit upon his attainment of
age 55 or prior to his death. This percentage will be based on full years of
service after January 1, 1994, and increased in 10% increments (from 10% to
100%) for every year of service after January 1994, starting with 10% at one
year of service up to 100% for 10 years of service. Payments shall be made in
equal monthly installments. In the event that, prior to age 65 or his early
retirement date, a “termination of protected employment” occurs following a
change in control, Mr. Vann shall be deemed to have retired as of his early
retirement date, and the early retirement date shall be considered the date of
the change in control. “Termination of protected employment” generally refers to
Mr. Vann’s termination of employment without just cause, or the employee’s
voluntary termination of employment for certain events which have not been
consented to in advance by him, including but not limited to a material
reduction in base compensation as in effect on the date of a change in control,
the failure of the Bank to maintain existing or substantially similar employee
benefit plans, the assignment of duties and responsibilities which are other
than those normally associated with his position, a material reduction in his
authority and responsibility, and the failure to elect or re-elect him to the
Board of Directors, if he has served on the Board during the term of the
agreement.
 
 In the event that Mr. Wall terminates
his service for reasons other than (i) his retirement on his early retirement
date, (ii) in connection with the merger of the Bank with or into another
business entity or the sale of more than a majority of the Bank’s assets to
another entity, or (iii) his death, and the termination occurs before he is
entitled to receive payments, he shall be entitled to receive a percentage of
his benefit upon his attainment of age 58 or prior death.  This
percentage will be based on full years of service after November 1, 1994, and
increased in 10% increments (from 10% to 100%) for every year of service after
November 1994, starting with 10% at one year of service up to 100% for 10 years
of service. Payments shall be made in equal monthly installments. In the event
Mr. Wall’s employment with the Bank is terminated for any reason coincident with
or within 24 months following a merger of the Bank with or into another business
entity or a sale of more than a majority of the Bank’s assets to another entity,
then Mr. Wall is deemed to have retired as of his early retirement date and he
is entitled to receive payments of $20,000 per year for 15 years, and the early
retirement date is deemed to be the date the merger or asset sale was
consummated.
 
 Under the terms of both the
supplemental income agreements and supplemental income plan agreements, payments
will commence no later than the first day of the sixth month following the month
in which the executive is entitled to the benefit. In addition, under
Mr. Vann’s arrangements, in the event of a change in control, a trust will
be established to fund his benefit.
 
 Other Retirement
Arrangements.Mr. Vann also participates
in a directors’ deferred compensation plan agreement, a directors’ retirement
plan agreement and a director’s deferred payment agreement. For a description of
these arrangements, see“Director
Compensation.”
  16
  Stock Option Agreements.Messrs.
Wall, Woodson and Jaber have received option grants under the First South
Bancorp, Inc. 1997 Stock Option Plan, as amended (the “1997 Plan”). Messrs.
Woodson and Nicholson have received option grants under the First South Bancorp,
Inc. 2008 Equity Incentive Plan (the “2008 Plan”). The 1997 Plan provides that,
in the event of a change in control of the Company or the Bank as defined in the
plan, or upon termination due to death, outstanding stock options automatically
vest and remain exercisable until the later of two years from the date of death
or disability or the expiration date of the stock options. The 2008 Plan
provides that, in the event of a change in control of the Company or the Bank as
defined in the plan, or upon termination due to death, outstanding stock options
automatically vest and remain exercisable until the expiration of the term of
the options. Presently, Messrs. Wall and Jaber have vested stock options.
Messrs. Wall, Woodson, Jaber and Nicholson also have unvested options
outstanding.
 
 Potential
Post-Termination Benefits Tables
 
 The
amount of compensation payable to each named executive officer upon the
occurrence of a termination event is shown below. The amounts shown assume that
such termination was effective as of December 31, 2008, and thus include
amounts earned through such time and are estimates of the amounts which would be
paid out to the executives upon their termination. The amounts shown relating to
unvested options are based on the fair market value of First South Bancorp
common stock on December 31, 2008 of $12.56. The actual amounts to be paid
out can only be determined at the time of such executive’s separation from First
South Bancorp, Inc. Non-forfeitable, fully vested amounts credited to the
accounts of the named executive officers under the Bank’s tax-qualified plans
and non-qualified deferred compensation plans and arrangements will be
distributed to the named executive officers in accordance with the terms of the
respective plans and are not set forth below.
 
 The
following table provides the amount of compensation payable to Mr. Vann for each
situation listed below:
 
 Payments Due UponPayment and Benefit
                      
                      Termination
                        For Just Cause
                      
                      
                      Termination
                        Without Just
                        Cause/For
                        Good Reason
                      
                      
                      Change in Control
                        With Termination
                        of Employment
                      
                      
                      Disability
                      
                      
                      Death
                      
                      
                      RetirementBase
      salary
                      
                      $
                      -
                      
                      
                      $
                      1,240,000
                      
                      
                      $
                      6,376,422
                      
                      
                      $
                      1,240,000
                      
                      
                      $
                      -
                      
                      
                      $
                      -Additional
      salary
                      
                      
                      -
                      
                      
                      
                      465,000
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Health
      and welfare benefits
                      
                      
                      -
                      
                      
                      
                      80,857
                      (1)
                      
                      
                      82,363
                      (2)
                      
                      
                      80,270
                      (3)
                      
                      
                      80,270
                      (3)
                      
                      
                      80,270
                      (3)Section 280G tax gross-up
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      2,420,847
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Total
                      
                      $
                      -
                      
                      
                      $
                      1,785,857
                      
                      
                      $
                      8,879,632
                      
                      
                      $
                      1,320,270
                      
                      
                      $
                      80,270
                      
                      
                      $
                      80,270
  
 (1)
              Based
      on 32 months of full payment of insurance premiums (employer and employee)
      and 18 years of payment of only the employer portion based on life
      expectancy of 80 years.
 (2)
              Based
      on 36 months of full payment of insurance premiums (employer and employee
      portion) and 18 years of payment of only the employer portion based on a
      life expectancy of 80 years.
 (3)
              Cost
      of Mrs. Vann’s health coverage for 21 years assuming a life expectancy of
      80 years.
  17
  The
following table provides the amount of compensation payable to Mr. Wall for each
situation listed below:
 
 Payments Due UponPayment
      and Benefit
                      
                      Termination
                        For
      Just Cause
                      
                      
                      Termination
                        Without
      Just
                        Cause/For
                        Good
      Reason
                      
                      
                      Change
      in Control
                        With
      Termination
                        of
      Employment
                      
                      
                      Disability
                      
                      
                      Death
                      
                      
                      RetirementBase
      salary
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      270,000
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -Health
      and welfare benefits
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      68,802
                      (1)
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Value
      of unvested stock options
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      (2)
                      
                      
                      -
                      (2)
                      
                      
                      -
                      (2)
                      
                      
                      -Total
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      338,802
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
  
 (1)
              Cost
      of Mr. Wall’s health coverage based on a life expectancy of 80
      years.
 (2)
              At
      December 31, 2008, there was no value in the unvested stock options since
      the market value was less than the exercise price of such unvested
      options.
 
 The following table provides the amount
of compensation payable to Mr. Woodson for each situation listed
below.
 
 Payments Due UponPayment and Benefit
                  
                  Termination
                    For Just Cause
                  
                  
                  Termination
                    Without Just
                    Cause/For
                    Good Reason
                  
                  
                  Change in Control
                    With Termination
                    of Employment
                  
                  
                  Disability
                  
                  
                  Death
                  
                  
                  RetirementBase
      salary
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  175,000
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Value
      of unvested stock options
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  (1)
                  
                  
                  -
                  (1)
                  
                  
                  -
                  (1)
                  
                  
                  -Total
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  175,000
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
  
 (1)
              At
      December 31, 2008, there was no value in the unvested stock options since
      the market value was less than the exercise price of such unvested
      options.
 
 The following table provides the amount
of compensation payable to Mr. Jaber for each situation listed
below.
 
 Payments Due UponPayment and Benefit
                  
                  Termination
                    For Just Cause
                  
                  
                  Termination
                    Without Just
                    Cause/For
                    Good Reason
                  
                  
                  Change in Control
                    With Termination
                    of Employment
                  
                  
                  Disability
                  
                  
                  Death
                  
                  
                  RetirementBase
      salary
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  205,500
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Value
      of unvested stock options
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  (1)
                  
                  
                  -
                  (1)
                  
                  
                  -
                  (1)
                  
                  
                  -Total
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  205,500
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -
  
 (1)
              December
      31, 2008, there was no value in the unvested stock options since the
      market value was less than the exercise price of such unvested
      options.
 
 Mr. Nicholson does not maintain a
Change in Control Protective Agreement with the Company and is not entitled to
any benefits (other than those provided under the Bank’s tax-qualified plans) in
the event of termination for Just Cause, termination without Just Cause or for
Good Reason, termination in connection with a change in control or termination
of employment as a result of death, disability or retirement.
 
  18
  Directors’
Compensation
 
 The following table provides the
compensation received by individuals who served as non-employee directors of the
Company during the 2008 fiscal year.  This table excludes perquisites,
which did not exceed $10,000 in the aggregate for each director.
 
 Name
                    
                    Fees Earned or
                      Paid in Cash ($)
                    
                    
                    Change in Pension
                      Value and
                      Nonqualified
                      Deferred
                      Compensation
                      Earnings (1)
                    
                    
                    Total ($)Linley
      H. Gibbs, Jr.
                    
                    $
                    55,400
                    
                    
                    $
                    4,889
                    
                    
                    $
                    60,289Frederick
      N. Holscher
                    
                    
                    56,800
                    
                    
                    
                    40,365
                    
                    
                    
                    97,165Frederick
      H. Howdy
                    
                    
                    55,000
                    
                    
                    
                    4,889
                    
                    
                    
                    59,889Charles
      E. Parker, Jr.
                    
                    
                    47,000
                    
                    
                    
                    39,707
                    
                    
                    
                    86,707H.D.
      Reaves, Jr.
                    
                    
                    35,000
                    
                    
                    
                    14,247
                    
                    
                    
                    49,247Marshall
      T. Singleton
                    
                    
                    47,400
                    
                    
                    
                    21,104
                    
                    
                    
                    68,504
  
 (1)
              The
      accumulated benefits under the Bank’s deferred compensation arrangements
      are calculated in accordance with Accounting Principles Board No. 12, as
      amended by Statement of Financial Accounting Standards No. 106, using a
      8.00% discount rate.
 
 Fees.  Through
December 31, 2008, each member of the Bank’s Board of Directors received a fee
of $2,750 for each regular and special Board meeting attended and $400 for each
Board committee meeting attended.No fees are paid for
attendance at meetings of the Company’s Board. Directors also participate in
certain benefit plans of the Company and the Bank, as described
below.
 
 Directors
are eligible to receive awards under the Company’s 2008 Equity Incentive Plan.
During the year ended December 31, 2008, no awards were made to directors under
the 2008 Plan.
 
 Directors’ Deferred Compensation
Plan Agreements.The Bank maintains a directors’ deferred
compensation plan agreement with directors Howdy, Gibbs, Parker, Singleton,
Holscher and Vann. Pursuant to the terms of the agreements, the participating
directors agreed to defer the receipt of their directors’ fees in the amount of
$350 per month, beginning on January 1, 1994 and ending on December 29,
1998.  In exchange for the agreement to defer fees, the directors
receive certain retirement benefits (described below).  Upon the later
to occur of their 65th birthday and January 1, 1999, the Bank shall pay each
Director 120 equal monthly payments of the following amounts: Mr. Parker—$1,533;
Mr. Singleton—$1,975; Mr. Holscher—$4,088; and Mr. Vann—$4,818.  The total payments to be made under the
Agreement to Messrs. Parker, Singleton, Holscher and Vann will be $183,960,
$237,000, $490,560 and $578,160, respectively.  During the year
ended December 31, 2008 the company accrued $3,785, $8,783, $17,922 and $19,583
for the benefit of Directors Parker, Singleton, Holscher and Vann, respectively,
pursuant to agreements with such Directors. In 2008, Messrs. Parker and
Singleton received payments under the agreements in the amount of $18,396 and
$23,700, respectively.
  In the event of a director’s death
after becoming entitled to receive a benefit but before all of the payments have
been made, the Bank shall make the remaining payments to the director’s
beneficiary.  Similarly, in the event of a director’s death while
serving as a director but before the qualifying date, the Bank will pay the
Deferred Amount per month for 120 months to the director’s
beneficiary.  In the event that a director voluntarily
resigns after January 1, 1996 but before the qualifying date, then
the director will receive a percentage of the monthly
benefit.  This percentage varies among the different agreements, but
is generally determined by a formula based on the director’s full years of
service after January 1, 1994.  The benefits generally vest over a
period of five to ten years under the different agreements.  All
agreements were fully vested at December 31, 2008.  Under the
agreements, if the directors had resigned on December 31, 2008,
Messrs. Holscher and Vann would begin to receive 120 monthly payments of
$4,088 and $4,818, respectively, commencing in January 2009.  In the
event that the director’s service is terminated on or before the qualifying date
for a reason other than death or voluntary resignation, then he shall be paid
the vested monthly benefit, and the qualifying date shall be deemed to be the
date of the director’s termination of service. The deferred compensation plan
agreements for Messrs. Holscher and Vann have been amended to comply with
the requirements of, and will be administered in accordance with Section 409A of
the Code.  Payments and benefits provided under the deferred
compensation plan agreements for Messrs. Holscher and Vann are subject to
certain restrictions imposed by Section 409A.
  19
 
 Directors’ Deferred Retirement Plan
Agreements.The Bank maintains a directors’ deferred
retirement plan agreement with directors Howdy, Parker, Singleton, Holscher,
Gibbs and Vann.  Under the terms of the retirement plan agreement, the
Bank will pay a director (or his beneficiary in the event of his death) a
monthly amount for a period of 120 months beginning upon the director’s
retirement plan qualifying date, which is defined as the later to occur of the
director’s 70th birthday or January 1, 1999.  Under the retirement
plan agreement, upon attainment of age 70, Messrs. Howdy, Gibbs, Parker,
Singleton, Holscher and Vann each would receive 120 monthly payments of $2,000
for a total of $240,000 for each individual.  During the year ended
December 31, 2008, the Company accrued $4,889, $4,889, $11,077, $12,321, $5,960
and $5,534 under the retirement plan for the benefit of directors Howdy, Gibbs,
Parker, Singleton, Holscher and Vann, respectively.  In 2008, Messrs.
Gibbs, Howdy and Parker each received payments under the agreement in the amount
of $24,000.
 
 The benefits under retirement plan
agreements generally vest over a period of five to ten years under the different
agreements.  All participants became 100% vested in their benefits as
of December 31, 2007.  In the event that on or before the retirement
plan qualifying date the director’s service is terminated for any reason within
24 months following a change in control, the Bank will pay the director the
monthly benefit for a period of 120 months.  The  retirement
plan agreements for Messrs. Holscher, Singleton and Vann have been amended
to comply with the requirements of, and will be administered in accordance with
Section 409A of the Code.  Payments and benefits provided under the
retirement plan agreements for Messrs. Holscher, Singleton and Vann are
subject to certain restrictions imposed by Section 409A.
 
 Directors’ Deferred Payment
Agreements.The Bank maintains a deferred compensation payment
agreement with directors Howdy, Gibbs, Parker, Holscher and
Vann.  Under the terms of each payment agreement, the directors
deferred receipt of directors fees in an amount equivalent to $291.66 per month
over a six-year period.  In addition, Mr. Vann agreed to defer receipt
of his director’s fees in the amount of $220.35 per month from September 1, 1995
until December 31, 2005.  In exchange for the agreement to defer
receipt of director’s fees, the directors will receive, upon the earlier of the
director’s 65th birthday or termination of service as a director for any reason
on or after attaining age 55, a certain amount per month for a period of 120
months.  Under the payment agreements, upon the earlier to occur of
attainment of age 65 or termination of service after attainment of age 55,
Messrs. Parker, Holscher and Vann would receive 120 monthly payments of $2,748,
$3,628 and $8,256, respectively.  The total payments to be made under the
agreement to Messrs. Parker, Holscher and Vann will be $329,760, $435,360 and
$990,720, respectively.During the year ended December 31,
2008, the Company accrued $9,348, $16,483 and $31,252 under the payment
agreements for the benefit of Directors Parker, Holscher and Vann,
respectively.
 
 In the event of a director’s death
after becoming entitled to receive monthly payments but before all payments have
been made, the Bank will pay all remaining amounts to the director’s
beneficiary. Similarly, in the event of the director’s death prior to the
commencement of his monthly payments, the Bank will pay a monthly amount for 120
months to the director’s beneficiary. In the event that prior to the
commencement of the monthly payments a director’s service is terminated for any
reason other than death, then the director will be entitled to begin receiving
his Payments (beginning on a date to be determined by the Bank, but not later
than the first day of the sixth month following the month in which the
director’s 55th birthday, or if earlier, death, occurs).  The deferred
payment agreements for Messrs. Holscher and Vann have been amended to
comply with the requirements of, and will be administered in accordance with
Section 409A of the Code.  Payments and benefits provided under the
deferred  payment agreements for Messrs. Holscher and Vann are
subject to certain restrictions imposed by Section 409A.
 
 Deferred Compensation
Agreement. In connection with the acquisition of Home Federal
Savings & Loan Association (“Home Federal”) in 1999, the Bank assumed the
obligations of Home Federal under a deferred compensation agreement with
Director Reaves.  Under the terms of this agreement, Mr. Reaves
deferred receipt of directors’ fees in the amount of $450 per month over a
five-year period.  In exchange for the agreement to defer receipt of
these salary payments, Mr. Reaves will receive upon his 65th birthday a payment
of $1,615 per month for a period of 120 months.  The total payments to be made under the
agreement to Mr. Reaves will be $193,800.During the year
ended December 31, 2008, the Company accrued $14,247 under the agreement for the
benefit of Director Reaves.  In 2008, Mr. Reaves received payments
under the agreement in the amount of $19,380.
 
 In the
event of Mr. Reaves’ death after becoming entitled to receive monthly payments
but before all payments have been made, the Bank will pay all remaining amounts
to his beneficiary.  Similarly, in the event of Mr. Reaves’ death
prior to the commencement of his monthly payments, the Bank will pay a monthly
amount for 120 months to his beneficiary.
  20
 
 Compensation
Committee Report
 
 The Compensation Committee has reviewed
and discussed with management the Compensation Discussion and Analysis that is
required by the rules established by the Securities and Exchange
Commission.  Based on such reviews and discussions, the Compensation
Committee recommended to the board of directors that the Compensation Discussion
and Analysis be included in the Company’s Annual Report on Form 10-K and Proxy
Statement on Schedule 14A for the year ended December 31, 2008.  See
“Compensation Discussion and
Analysis.”
 
 The
Compensation Committee of the Board of Directors
 of
First South Bancorp, Inc.
 Linley H.
Gibbs, Jr.
 Frederick
N. Holscher
 Frederick
H. Howdy
 
 Compensation
Committee Interlocks and Insider Participation
 
 The
members of the Compensation Committee of the Company’s Board of Directors during
the year ended December 31, 2008 were Linley H. Gibbs, Jr., Frederick N.
Holscher and Frederick H. Howdy.  None of such individuals was an
officer or employee of the Company or the Bank during the year
ended  December 31, 2008, was formerly an officer of the Company or
the Bank or had any relationship involving a transaction with the Company
required to be disclosed by the Company under Item 13 of the Company’s
Annual Report on Form 10-K.
 
 During
the year ended December 31, 2008:
 
 •
              No executive officer of the
      Company or the Bank served as a member of the compensation committee of
      another entity, one of whose executive officers served on the Compensation
      Committee of the Company or the
Bank;
 •
              No executive officer of the
      Company or the Bank served as a director of another entity, one of whose
      executive officers served on the Compensation Committee of the Company or
      the Bank; and
 •
                No executive officer of the
      Company or the Bank served as a member of the compensation committee of
      another entity, one of whose executive officers served as a director of
      the Company or the
Bank.
 
 Additional information required by this
item is incorporated herein by reference to Part III, Item 10 above entitled
“Directors, Executive Officers
and Corporate Governance.”
 
 Item
12.Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
 
 As of
April 6, 2009, no stockholder known to management owned more than 5% of the
Company’s Common Stock.
 
 Security Ownership of
Management.As of April 6, 2009, the beneficial ownership of
the Common Stock by each of the Company’s directors, and by directors and
executive officers as a group, was as follows:
 
 Shares
      of Common StockBeneficially
      Owned as
                    
                    
                    Percent
      ofof April 6, 2009 (1)
                    
                    
                    Class (2)Directors:Linley
      H. Gibbs, Jr.
                    
                    
                    158,794
                    (3)
                    
                    
                    1.63
                    %Frederick
      N. Holscher
                    
                    
                    114,915
                    (4)
                    
                    
                    1.18Frederick
      H. Howdy
                    
                    
                    174,810
      1.80Charles
      E. Parker, Jr.
                    
                    
                    158,480
                    (5)
                    
                    
                    1.63H.D.
      Reaves, Jr.
                    
                    
                    1,016
                    *Marshall
      T. Singleton
                    
                    
                    255,922
                    (6)
                    
                    
                    2.63Thomas
      A. Vann
                    
                    
                    444,817
                    (7)
                    
                    
                    4.57All
      directors and executive officers of the
                      Company as a group (14 persons)
                    
                    
                    1,610,277
                    (8)
                    
                    
                    16.50
  
 *
              Amount
      owned is less than 1% of the Company’s outstanding common
      stock.
  21
 
 (1)
              In
      accordance with Rule 13d-3 under the Exchange Act, a person is deemed to
      be the beneficial owner, for purposes of this table, of any shares of
      Common Stock if he or she has or shares voting or investment power with
      respect to such Common Stock.  As used herein, “voting power” is
      the power to vote or direct the voting of shares and “investment power” is
      the power to dispose or direct the disposition of
      shares.  Except as otherwise noted, ownership is direct, and the
      named individuals and group exercise sole voting and investment power over
      the shares of the Common Stock.
 (2)
              Based
      on a total of 9,738,096 shares of Common Stock outstanding as of April 6,
      2009.
 (3)
              Includes
      51,750 shares owned by a family
trust.
 (4)
              Includes
      6,832 shares owned by Mr. Holscher’s
spouse.
 (5)
              Includes
      225 shares owned by Mr. Parker’s
spouse.
 (6)
              Includes
      7,512 shares owned by Mr. Singleton’s
spouse.
 (7)
              Includes
      184,770 shares owned by Mr. Vann’s
spouse.
 (8)
              Includes
      21,125 shares executive officers as a group have the right to acquire upon
      the exercise of options exercisable within 60 days of April 6,
      2009.
 
 Changes in
Control.  Management of the Company knows of no arrangements,
including any pledge by any person of securities of the Company, the operation
of which may at a subsequent date result in a change in control of the
registrant.
 
 Equity Compensation
Plans.The following table sets forth certain information with
respect to the Company’s equity compensation plans as of December 31,
2008.
 
 (a)
                    
                    
                    (b)
                    
                    
                    (c)Plan category:
                    
                    Number of securities to
                      be issued upon exercise of
                      outstanding options,
                      warrants and rights
                    
                    
                    Weighted-average
                      exercise
                      price of outstanding
                      options, warrants
                      andrights
                    
                    
                    Number of securities
                      remaining
                      available for future issuance
                      under equity compensation
                      plans (excluding securities
                      reflected in column (a))Equity
      compensation plans approved by security holders
                    
                    
                    172,295
                    
                    
                    $
                    17.52
                    
                    
                    
                    947,000Equity
      compensation plans not approved by security holders
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Total
                    
                    
                    172,295
                    
                    
                    $
                    17.52
                    
                    
                    
                    947,000
 
 Additional
information required by this item is incorporated herein by reference to Part
III, Item 10 above entitled “Directors, Executive Officers and
Corporate Governance.”
 
 Item
13.Certain
Relationships and Related Transactions and Director
Independence
 
 The Bank
offers loans to its directors and executive officers.  At December 31,
2008, the Bank’s loans to directors and executive officers totaled $1.4 million,
or 1.6% of the Company’s stockholders’ equity at that date.  All loans
to the Company’s and the Bank’s directors and executive officers and members of
their immediate families and corporations or organizations of which a director
or executive officer is an executive officer, partner or 10% owner were made in
the ordinary course of business on the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons, and do not involve more than the normal risk of collectibility or
present other unfavorable features.
  The Company does not have a
comprehensive written policy for the review, approval or ratification of certain
transactions with related persons.  However, in accordance with
banking regulations, the Board of Directors reviews all loans made to a director
or executive officer, and any such loan must be approved in advance by a
majority of the disinterested members of the Board of
Directors.  Additionally, any transaction with a related person must
be approved by the Audit Committee.
 
 Additional information required by this
item is incorporated herein by reference to Part III, Item 10 above entitled
“Directors, Executive Officers
and Corporate Governance.”
  22
 
 Item
14.  Principal Accountant Fees and Services
 
 Turlington
and Company, L.L.P. (“Turlington”) has served as the Company’s independent
auditors to audit the Company’s three most recent fiscal year ends.
 
 The Audit
Committee of the Board of Directors has appointed Turlington and Company, L.L.P.
to be the Company’s independent registered public accounting firm for the year
ending December 31, 2009, subject to ratification by stockholders.
 
 REPORT
OF THE AUDIT COMMITTEE
 As
detailed in the Audit Committee Charter, the role of the Audit Committee of the
Board (the “Audit Committee”) is to assist the Board in fulfilling its oversight
responsibilities regarding the following:
  1.
              The
      review of the Company’s financial statements, including matters relating
      to its internal controls;
  2.
              The
      qualification and independence of the Company’s independent
      auditors;
  3.
              The
      performance of the Company’s internal auditors and the independent
      auditors; and
  4.
              The
      Company’s compliance with legal and regulatory
    requirements.
  Management
is responsible for the preparation and presentation of the Company’s financial
statements and its overall financial reporting process, and with the assistance
of the Company’s internal auditors, for maintaining appropriate internal
controls and procedures that provide for compliance with accounting standards
and applicable laws.  The independent auditors are responsible for
planning and carrying out a proper audit of the Company’s financial statements,
expressing an opinion as to their conformity with generally accepted accounting
principles and annually auditing management’s assessment of the effectiveness of
internal control over financial reporting.  Members of the Audit
Committee are not professionally engaged in the practice of auditing and
accounting and are not full-time employees of the Company.
  In the
performance of its oversight function, the Audit Committee, among other things,
reviewed and discussed the audited financial statements with management and the
independent auditors have confirmed to the Audit Committee that the financial
statements were prepared in accordance with generally accepted accounting
principles.  The Audit Committee has also discussed with the
independent auditors the matters required to be discussed by Statement on
Auditing Standards No. 114, Communication with Those Charged
with Governance, as currently in effect.  In addition, the
Audit Committee has received the written disclosures and the letter from the
independent auditors required by applicable requirements of the Public Company
Accounting Oversight Board regarding the independent auditor’s communication
with the Audit Committee concerning independence, has considered whether the
provisions of non-audit services by the independent auditors to the Company is
compatible with maintaining the auditor’s independence, and has discussed with
the auditors the auditor’s independence.
  Based
upon the review and discussions in this report, and subject to the limitations
on the role and responsibilities of the Audit Committee referred to above and in
the Audit Committee’s charter, the Audit Committee recommended to the Board that
the audited financial statements for the fiscal year ended December 31, 2008 be
included in the Company’s Annual Report on Form 10-K for the year ended December
31, 2008, filed with the Securities and Exchange Commission.
  Members
of the Audit Committee
  Marshall
T. Singleton, Chairman
 Charles
E. Parker, Jr.
 H. D.
Reaves, Jr.
  23
  
 AUDIT
AND OTHER FEES PAID TO INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
 
 The
following information is provided regarding fees billed by the Company’s
independent registered public accounting firms for the fiscal years ended
December 31, 2008 and 2007.  Audit, audit-related and tax fees were
billed by Turlington as follows:
 
 Audit
Fees
  The
aggregate fees billed by Turlington for the audit of the Company’s annual
consolidated financial statements, Sarbanes Oxley Act Section 404 attestation
services and for the reviews of the financial statements included in the
Company’s Quarterly Reports on Form 10-Q were $121,100 for the fiscal year ended
December 31, 2008 and $115,300 for the fiscal year ended December 31,
2007.
  Audit-Related
Fees
  The
aggregate fees billed by Turlington for audit-related services relating to the
employee benefit plan audit were $18,750 for the fiscal year ended December 31,
2008 and $17,850 for the fiscal year ended December 31, 2007.
  Tax
Fees
  The
aggregate fees billed by Turlington for tax services for the fiscal years ended
December 31, 2008 and 2007 were $18,400 and $17,500, respectively, relating to
preparation of federal and state income tax returns and the review of accrued
and deferred income taxes.
  All
Other Fees
  No fees
were billed by the Company’s independent auditor for services not included above
for the fiscal years ended December 31, 2008 and 2007.
  24
 
 SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this amendment to this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
 
 FIRST
      SOUTH BANCORP, INC.May
      11, 2009
                    By:
                    /s/
      Thomas A. VannThomas
      A. VannPresident
      and Chief Executive
Officer
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this amendment to
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
 
 /s/
      Thomas A. Vann
                                                  
                                                  May
      11 , 2009Thomas
      A. VannPresident,
      Chief Executive Officer and Director(Principal
      Executive Officer)/s/
      William L. Wall
                                                  
                                                  May
      11 , 2009William
      L. WallExecutive
      Vice President, Chief FinancialOfficer
      and Secretary(Principal
      Financial and Accounting Officer)/s/
      Linley H. Gibbs, Jr.
                                                  
                                                  May
      11 , 2009Linley
      H. Gibbs, Jr.Director/s/
      Frederick N. Holscher
                                                  
                                                  May
      11 , 2009Frederick
      N. HolscherDirector/s/
      Frederick H. Howdy
                                                  
                                                  May
      11 , 2009Frederick
      H. HowdyDirector/s/
      Charles E. Parker, Jr.
                                                  
                                                  May
      11 , 2009Charles
      E. Parker, Jr.Director/s/
      Marshall T. Singleton
                                                  
                                                  May
      11 , 2009Marshall
      T. SingletonDirector/s/
      H. D. Reaves, Jr.
                                                  
                                                  May
      11 , 2009H.
      D. Reaves, Jr.Director
  25