UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q


(Mark
One)


x
            QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934





For the
quarterly period ended September 30, 2009.





OR


 ̈
            TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THESECURITIES
      EXCHANGE ACT OF 1934


For the
transition period from  to .





Commission
File Number: 0-22219





FIRST SOUTH BANCORP,
INC.


(Exact
name of registrant as specified in its charter)





Virginia
                
                56-1999749(State
      or other jurisdiction of
                
                (IRS
      Employerincorporation
      or organization)
                
                Identification
      No.)





1311 Carolina Avenue,
Washington, North Carolina 27889


(Address
of principal executive offices)


(Zip
Code)





(252)
946-4178


(Registrant's
telephone number, including area code)





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  xNo
 ̈





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 definition of “large accelerated
filer,”  “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.  (Check one)





Large
      Accelerated Filer  ̈
                    
                    Accelerated FilerxNon-Accelerated Filer ̈
                    
                    Smaller Reporting Company ̈(Do
      not check if a Smaller Reporting
Company)





Indicate
by check mark whether registrant is a shell company (as defined by Rule 12b-2 of
the Exchange Act).   Yes  ̈No
x





Number of
shares of common stock outstanding as of November 4, 2009:
9,740,596.








CONTENTS





PAGEPART
      I.   FINANCIAL
      INFORMATIONItem
      1.
                                  Financial
      StatementsConsolidated
      Statements of Financial Condition as of September 30, 2009 (unaudited) and
      December 31, 2008
                                  
                                  
                                  1Consolidated
      Statements of Operations for the Three and Nine Months Ended September 30,
      2009 and 2008 (unaudited)
                                  
                                  
                                  2Consolidated
      Statement of Stockholders' Equity for the Nine Months Ended September 30,
      2009 (unaudited)
                                  
                                  
                                  3Consolidated
      Statements of Cash Flows for the Nine Months Ended September 30, 2009 and
      2008 (unaudited)
                                  
                                  
                                  4Notes
      to Consolidated Financial Statements (unaudited)
                                  
                                  
                                  5Item
      2.
                                  Management's
      Discussion and Analysis of Financial Condition
      and   Results of Operation
                                  
                                  
                                  10Item
      3.
                                  Quantitative
      and Qualitative Disclosures About Market Risk
                                  
                                  
                                  18Item
      4.
                                  Controls
      and Procedures
                                  
                                  
                                  18PART
      II.   OTHER
      INFORMATIONItem
      1.
                                  Legal
      Proceedings
                                  
                                  
                                  19Item
      2.
                                  Unregistered
      Sales of Equity Securities and Use of Proceeds
                                  
                                  
                                  19Item
      3.
                                  Defaults
      Upon Senior Securities
                                  
                                  
                                  19Item
      4.
                                  Submission
      of Matters to a Vote of Security Holders
                                  
                                  
                                  19Item
      5.
                                  Other
      Information
                                  
                                  
                                  19Item
      6.
                                  Exhibits
                                  
                                  
                                  19Signatures
                                  
                                  
                                  20Exhibits





First
South Bancorp, Inc. and Subsidiary
 Consolidated
Statements of Financial Condition
 
 September 30
                                    
                                    
                                    December 312009
                                    
                                    
                                    
                                    2008
                                    *(unaudited)AssetsCash
      and due from banks
                                    
                                    $
                                    16,426,912
                                    
                                    
                                    $
                                    20,888,676Interest-bearing
      deposits in financial institutions
                                    
                                    
                                    24,882,380
                                    
                                    
                                    
                                    5,831,683Investment
      securities - available for sale
                                    
                                    
                                    5,431,669
                                    
                                    
                                    
                                    36,563,646Mortgage-backed
      securities - available for sale
                                    
                                    
                                    85,677,465
                                    
                                    
                                    
                                    31,995,157Mortgage-backed
      securities - held for investment
                                    
                                    
                                    597,170
                                    
                                    
                                    
                                    832,221Loans
      and leases receivable, net:Held
      for sale
                                    
                                    
                                    7,395,152
                                    
                                    
                                    
                                    5,566,262Held
      for investment
                                    
                                    
                                    674,301,261
                                    
                                    
                                    
                                    739,165,035Premises
      and equipment, net
                                    
                                    
                                    8,608,313
                                    
                                    
                                    
                                    9,049,929Other
      real estate owned
                                    
                                    
                                    12,474,026
                                    
                                    
                                    
                                    7,710,560Federal
      Home Loan Bank of Atlanta stock, at cost which approximates
      market
                                    
                                    
                                    3,889,500
                                    
                                    
                                    
                                    3,658,600Accrued
      interest receivable
                                    
                                    
                                    3,425,955
                                    
                                    
                                    
                                    3,786,760Goodwill
                                    
                                    
                                    4,218,576
                                    
                                    
                                    
                                    4,218,576Mortgage
      servicing rights
                                    
                                    
                                    1,247,265
                                    
                                    
                                    
                                    1,005,725Identifiable
      intangible assets
                                    
                                    
                                    141,480
                                    
                                    
                                    
                                    165,060Prepaid
      expenses and other assets
                                    
                                    
                                    7,216,243
                                    
                                    
                                    
                                    5,417,231Total
      assets
                                    
                                    $
                                    855,933,367
                                    
                                    
                                    $
                                    875,855,121Liabilities
      and Stockholders' EquityDeposits:Demand
                                    
                                    $
                                    220,017,625
                                    
                                    
                                    $
                                    223,365,542Savings
                                    
                                    
                                    23,407,287
                                    
                                    
                                    
                                    26,555,881Large
      denomination certificates of deposit
                                    
                                    
                                    236,658,259
                                    
                                    
                                    
                                    207,102,876Other
      time
                                    
                                    
                                    229,768,022
                                    
                                    
                                    
                                    259,402,497Total
      deposits
                                    
                                    
                                    709,851,193
                                    
                                    
                                    
                                    716,426,796Borrowed
      money
                                    
                                    
                                    39,040,146
                                    
                                    
                                    
                                    52,558,492Junior
      subordinated debentures
                                    
                                    
                                    10,310,000
                                    
                                    
                                    
                                    10,310,000Other
      liabilities
                                    
                                    
                                    9,451,493
                                    
                                    
                                    
                                    8,738,808Total
      liabilities
                                    
                                    
                                    768,652,832
                                    
                                    
                                    
                                    788,034,096Common
      stock, $.01 par value, 25,000,000 shares authorized; 11,254,222 issued;
      9,740,596 and 9,738,096 shares outstanding
                                    
                                    
                                    97,406
                                    
                                    
                                    
                                    97,381Additional
      paid-in capital
                                    
                                    
                                    35,842,550
                                    
                                    
                                    
                                    35,924,426Retained
      earnings, substantially restricted
                                    
                                    
                                    82,549,803
                                    
                                    
                                    
                                    82,867,095Treasury
      stock at cost
                                    
                                    
                                    (32,194,216
                                    )
                                    
                                    
                                    (32,247,365
                                    )Accumulated
      other comprehensive income, net
                                    
                                    
                                    984,992
                                    
                                    
                                    
                                    1,179,488Total
      stockholders' equity
                                    
                                    
                                    87,280,535
                                    
                                    
                                    
                                    87,821,025Total
      liabilities and stockholders' equity
                                    
                                    $
                                    855,933,367
                                    
                                    
                                    $
                                    875,855,121
 
 *Derived
from audited consolidated financial statements
 
 See
Notes to Consolidated Financial Statements.
  1
 
 First
South Bancorp, Inc. and Subsidiary
 Consolidated
Statements of Operations
 (unaudited)
 
 Three Months Ended
                      
                      
                      Nine Months EndedSeptember 30
                      
                      
                      September 302009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Interest
      income:Interest
      and fees on loans
                      
                      $
                      11,162,577
                      
                      
                      $
                      13,379,203
                      
                      
                      $
                      34,428,527
                      
                      
                      $
                      42,721,576Interest
      and dividends on investments and deposits
                      
                      
                      1,033,088
                      
                      
                      
                      1,010,107
                      
                      
                      
                      2,779,797
                      
                      
                      
                      3,269,998Total
      interest income
                      
                      
                      12,195,665
                      
                      
                      
                      14,389,310
                      
                      
                      
                      37,208,324
                      
                      
                      
                      45,991,574Interest
      expense:Interest
      on deposits
                      
                      
                      3,537,810
                      
                      
                      
                      4,864,737
                      
                      
                      
                      11,815,289
                      
                      
                      
                      16,556,440Interest
      on borrowings
                      
                      
                      293,355
                      
                      
                      
                      399,500
                      
                      
                      
                      974,106
                      
                      
                      
                      1,194,757Interest
      on junior subordinated notes
                      
                      
                      90,658
                      
                      
                      
                      146,960
                      
                      
                      
                      307,966
                      
                      
                      
                      487,915Total
      interest expense
                      
                      
                      3,921,823
                      
                      
                      
                      5,411,197
                      
                      
                      
                      13,097,361
                      
                      
                      
                      18,239,112Net
      interest income
                      
                      
                      8,273,842
                      
                      
                      
                      8,978,113
                      
                      
                      
                      24,110,963
                      
                      
                      
                      27,752,462Provision
      for credit losses
                      
                      
                      1,260,000
                      
                      
                      
                      1,744,916
                      
                      
                      
                      4,480,000
                      
                      
                      
                      2,893,600Net
      interest income after provision for credit losses
                      
                      
                      7,013,842
                      
                      
                      
                      7,233,197
                      
                      
                      
                      19,630,963
                      
                      
                      
                      24,858,862Non-interest
      income:Fees
      and service charges
                      
                      
                      1,835,435
                      
                      
                      
                      1,897,939
                      
                      
                      
                      5,477,372
                      
                      
                      
                      5,879,783Loan
      servicing fees
                      
                      
                      173,967
                      
                      
                      
                      163,967
                      
                      
                      
                      496,795
                      
                      
                      
                      490,496Gain
      (loss) on sale of other real estate, net
                      
                      
                      (86,875
                      )
                      
                      
                      (3,664
                      )
                      
                      
                      (161,323
                      )
                      
                      
                      96,837Gain
      on sale of mortgage loans
                      
                      
                      247,189
                      
                      
                      
                      108,316
                      
                      
                      
                      935,291
                      
                      
                      
                      512,544Gain
      on sale of mortgage-backed securities
                      
                      
                      -
                      
                      
                      
                      27,626
                      
                      
                      
                      -
                      
                      
                      
                      97,537Gain
      on sale of investment securities
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      917,866
                      
                      
                      
                      -Other  income
                      
                      
                      231,313
                      
                      
                      
                      246,401
                      
                      
                      
                      768,081
                      
                      
                      
                      857,348Total
      non-interest income
                      
                      
                      2,401,029
                      
                      
                      
                      2,440,585
                      
                      
                      
                      8,434,082
                      
                      
                      
                      7,934,545Non-interest
      expense:Compensation
      and fringe benefits
                      
                      
                      3,524,025
                      
                      
                      
                      3,401,733
                      
                      
                      
                      10,523,200
                      
                      
                      
                      10,440,902Federal
      insurance premiums
                      
                      
                      274,908
                      
                      
                      
                      109,413
                      
                      
                      
                      955,117
                      
                      
                      
                      153,190Premises
      and equipment
                      
                      
                      451,967
                      
                      
                      
                      500,037
                      
                      
                      
                      1,371,822
                      
                      
                      
                      1,512,625Advertising
                      
                      
                      37,155
                      
                      
                      
                      23,637
                      
                      
                      
                      100,171
                      
                      
                      
                      86,941Payroll
      and other taxes
                      
                      
                      330,426
                      
                      
                      
                      276,201
                      
                      
                      
                      1,017,520
                      
                      
                      
                      970,764Data
      processing
                      
                      
                      625,837
                      
                      
                      
                      686,707
                      
                      
                      
                      1,829,505
                      
                      
                      
                      1,953,777Amortization
      of intangible assets
                      
                      
                      122,003
                      
                      
                      
                      103,108
                      
                      
                      
                      371,334
                      
                      
                      
                      331,910Other
                      
                      
                      1,164,154
                      
                      
                      
                      1,221,041
                      
                      
                      
                      2,877,064
                      
                      
                      
                      2,727,470Total
      non-interest expense
                      
                      
                      6,530,475
                      
                      
                      
                      6,321,877
                      
                      
                      
                      19,045,733
                      
                      
                      
                      18,177,579Income
      before income taxes
                      
                      
                      2,884,396
                      
                      
                      
                      3,351,905
                      
                      
                      
                      9,019,312
                      
                      
                      
                      14,615,828Income
      taxes
                      
                      
                      1,122,727
                      
                      
                      
                      1,296,251
                      
                      
                      
                      3,493,246
                      
                      
                      
                      5,647,470Net
      income
                      
                      $
                      1,761,669
                      
                      
                      $
                      2,055,654
                      
                      
                      $
                      5,526,066
                      
                      
                      $
                      8,968,358Per
      share data:Basic
      earnings per share
                      
                      $
                      0.18
                      
                      
                      $
                      0.21
                      
                      
                      $
                      0.57
                      
                      
                      $
                      0.93Diluted
      earnings per share
                      
                      $
                      0.18
                      
                      
                      $
                      0.21
                      
                      
                      $
                      0.57
                      
                      
                      $
                      0.93Dividends
      per share
                      
                      $
                      0.20
                      
                      
                      $
                      0.20
                      
                      
                      $
                      0.60
                      
                      
                      $
                      0.60Weighted
      average shares-Basic
                      
                      
                      9,738,475
                      
                      
                      
                      9,751,221
                      
                      
                      
                      9,738,225
                      
                      
                      
                      9,719,512Weighted
      average shares-Diluted
                      
                      
                      9,738,550
                      
                      
                      
                      9,768,515
                      
                      
                      
                      9,738,250
                      
                      
                      
                      9,743,727
 
 See
Notes to Consolidated Financial Statements.
  2
 
 First
South Bancorp, Inc. and Subsidiary
 Consolidated
Statement of Stockholders' Equity
 Nine
Months Ended September 30, 2009
 (unaudited)
 
 AccumulatedRetained
                      
                      
                      
                      
                      
                      OtherAdditional
                      
                      
                      Earnings,
                      
                      
                      
                      
                      
                      ComprehensiveCommon
                      
                      
                      Paid-in
                      
                      
                      Substantially
                      
                      
                      Treasury
                      
                      
                      Loss,Stock
                      
                      
                      Capital
                      
                      
                      Restricted
                      
                      
                      Stock
                      
                      
                      Net
                      
                      
                      TotalBalance,
      December 31, 2008
                      
                      $
                      97,381
                      
                      
                      $
                      35,924,426
                      
                      
                      $
                      82,867,095
                      
                      
                      $
                      (32,247,365
                      )
                      
                      $
                      1,179,488
                      
                      
                      $
                      87,821,025Net
      income
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      5,526,066
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      5,526,066Other
      comprehensive loss, net of taxes
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (194,496
                      )
                      
                      
                      (194,496
                      )Exercise
      of stock options
                      
                      
                      25
                      
                      
                      
                      (35,996
                      )
                      
                      
                      
                      
                      
                      
                      53,149
                      
                      
                      
                      
                      
                      
                      
                      17,178Tax
      benefit of stock options exercised
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      0Shares
      traded to exercise options
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      0Acquisition
      of treasury shares
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      0Stock
      based compensation
                      
                      
                      
                      
                      
                      
                      (45,880
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (45,880
                      )Dividends
      ($0.60 per share)
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (5,843,358
                      )
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (5,843,358
                      )Balance,
      September 30, 2009
                      
                      $
                      97,406
                      
                      
                      $
                      35,842,550
                      
                      
                      $
                      82,549,803
                      
                      
                      $
                      (32,194,216
                      )
                      
                      $
                      984,992
                      
                      
                      $
                      87,280,535
  See Notes to Consolidated
Financial Statements.
  3
 
 First
South Bancorp, Inc. and Subsidiary
 Consolidated
Statements of Cash Flows
 (unaudited)
 
 Nine
      Months EndedSeptember
      302009
                                  
                                  
                                  2008Operating
      activities:Net
      income
                                  
                                  $
                                  5,526,066
                                  
                                  
                                  $
                                  8,968,358Adjustments
      to reconcile net income to net cash provided by operating
      activities:Provision
      for credit losses
                                  
                                  
                                  4,480,000
                                  
                                  
                                  
                                  2,893,600Depreciation
                                  
                                  
                                  629,208
                                  
                                  
                                  
                                  659,991Amortization
      of intangibles
                                  
                                  
                                  371,334
                                  
                                  
                                  
                                  331,910Accretion
      of discounts on securities, net
                                  
                                  
                                  (64,113
                                  )
                                  
                                  
                                  5,241Loss
      (gain) on disposal of premises and equipment and other real estate
      owned
                                  
                                  
                                  160,752
                                  
                                  
                                  
                                  (95,298
                                  )Gain
      on sale of loans and mortgage-backed securities held for
    sale
                                  
                                  
                                  (935,291
                                  )
                                  
                                  
                                  (610,081
                                  )Gain
      on sale of investment securities available for sale
                                  
                                  
                                  (917,866
                                  )
                                  
                                  
                                  -Stock
      based compensation (income) expense
                                  
                                  
                                  (45,880
                                  )
                                  
                                  
                                  24,157Originations
      of loans held for sale, net
                                  
                                  
                                  (88,262,687
                                  )
                                  
                                  
                                  (32,280,261
                                  )Proceeds
      from sale of loans held for sale
                                  
                                  
                                  25,403,227
                                  
                                  
                                  
                                  33,507,018Other
      operating activities
                                  
                                  
                                  631,100
                                  
                                  
                                  
                                  2,072,108Net
      cash provided by (used in) operating activities
                                  
                                  
                                  (53,024,150
                                  )
                                  
                                  
                                  15,476,743Investing
      activities:Proceeds
      from maturities of investment securities available for
sale
                                  
                                  
                                  15,000,000
                                  
                                  
                                  
                                  8,000,000Proceeds
      from sale of investment securities available for sale
                                  
                                  
                                  20,917,866
                                  
                                  
                                  
                                  -Proceeds
      from principal repayments of mortgage-backedsecurities
      available for sale
                                  
                                  
                                  9,158,161
                                  
                                  
                                  
                                  9,587,951Proceeds
      from principal repayments of mortgage-backed securities held for
      investment
                                  
                                  
                                  235,051
                                  
                                  
                                  
                                  353,074Originations
      of loans held for investment, net of principal repayments
                                  
                                  
                                  46,760,172
                                  
                                  
                                  
                                  752,830Proceeds
      from disposal of premises and equipment and other real estate
      owned
                                  
                                  
                                  6,881,783
                                  
                                  
                                  
                                  1,723,001Purchase
      of investment securities
                                  
                                  
                                  (5,000,000
                                  )
                                  
                                  
                                  -Purchase
      of FHLB stock
                                  
                                  
                                  (230,900
                                  )
                                  
                                  
                                  (448,500
                                  )Purchase
      of premises and equipment
                                  
                                  
                                  (189,421
                                  )
                                  
                                  
                                  (461,938
                                  )Net
      cash provided by investing activities
                                  
                                  
                                  93,532,712
                                  
                                  
                                  
                                  19,506,418Financing
      activities:Net
      decrease in deposit accounts
                                  
                                  
                                  (6,575,603
                                  )
                                  
                                  
                                  (38,500,086
                                  )Net
      increase (decrease) in FHLB borrowings
                                  
                                  
                                  (10,000,000
                                  )
                                  
                                  
                                  10,000,000Purchase
      of treasury shares
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (3,295,599
                                  )Proceeds
      from exercise of stock options, net of tax benefit
                                  
                                  
                                  17,178
                                  
                                  
                                  
                                  1,056,558Cash
      paid for dividends
                                  
                                  
                                  (5,842,858
                                  )
                                  
                                  
                                  (5,852,133
                                  )Net
      change in repurchase agreements
                                  
                                  
                                  (3,518,346
                                  )
                                  
                                  
                                  5,704,756Net
      cash used in financing activities
                                  
                                  
                                  (25,919,629
                                  )
                                  
                                  
                                  (30,886,504
                                  )Increase
      in cash and cash equivalents
                                  
                                  
                                  14,588,933
                                  
                                  
                                  
                                  4,096,657Cash
      and cash equivalents, beginning of period
                                  
                                  
                                  26,720,359
                                  
                                  
                                  
                                  24,029,287Cash
      and cash equivalents, end of period
                                  
                                  $
                                  41,309,292
                                  
                                  
                                  $
                                  28,125,944Supplemental
      disclosures:Other
      real estate acquired in settlement of loans
                                  
                                  $
                                  13,623,602
                                  
                                  
                                  $
                                  7,600,885Dividends
      declared, not paid
                                  
                                  $
                                  1,948,119
                                  
                                  
                                  $
                                  1,947,619Exchange
      of loans for mortgage-backed securities
                                  
                                  $
                                  61,965,861
                                  
                                  
                                  $
                                  3,399,071
 
 See
Notes to Consolidated Financial Statements.
  4




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





Note 1.  Basis of
Presentation.The accompanying unaudited consolidated
financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America and with the instructions to
Form 10-Q of Regulation S-X.  Accordingly, they do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial
statements.  In the opinion of management, all adjustments necessary
for fair presentation of the financial position and results of operations for
the periods presented are included, none of which are other than normal
recurring accruals.  The financial statements of First South Bancorp,
Inc. (the “Company”) and First South Bank (the “Bank”) are presented on a
consolidated basis.  The results of operations for the three and nine
month periods ended September 30, 2009 are not necessarily indicative of the
results of operations that may be expected for the year ended December 31,
2009.





Note 2.  Earnings Per
Share.Basic and diluted earnings per share for the three and
nine month periods ended September 30, 2009 are based on weighted average shares
of common stock outstanding, excluding treasury shares.   Diluted
earnings per share include the potentially dilutive effects of the Company’s
stock option plan.  At September 30, 2009 and 2008, there were 116,937
and 85,700 stock options that were antidilutive because their exercise prices
exceeded the average market price of the Company’s common stock for the
respective periods.   Antidilutive stock options have been
omitted from the calculation of diluted earnings per share for the respective
2009 and 2008 periods.





Note 3.  Allowance for Credit
Losses.Activity in the allowance for credit losses, including
the allowances for loan and lease losses and unfunded loan commitments, is
summarized as follows:





Allowance for
                  Loan and
                  Lease Losses
                
                
                Allowance for
                  Unfunded
                  Commitments
                
                
                Allowance For
                  Credit LossesBalance
      at December 31, 2008
                
                $
                11,617,706
                
                
                $
                339,995
                
                
                $
                11,957,701Provision
      for credit losses
                
                
                4,480,000
                
                
                
                -
                
                
                
                4,480,000Reclassification
                
                
                71,184
                
                
                
                (71,184
                )
                
                
                -Loans
      and leases charged-off
                
                
                (3,996,543
                )
                
                
                -
                
                
                
                (3,996,543
                )Loans
      and leases recovered
                
                
                146,076
                
                
                
                -
                
                
                
                146,076Net
      (charge-offs)/recoveries
                
                $
                (3,850,467
                )
                
                $
                -
                
                
                $
                (3,850,467
                )Balance
      at September 30, 2009
                
                $
                12,318,423
                
                
                $
                268,811
                
                
                $
                12,587,234





September 30,
                    2009
                  
                  
                  December 31,
                    2008Allowance for Credit Losses RatiosAllowances
      for loan and lease losses/total loans and leases
                  
                  
                  1.77
                  %
                  
                  
                  1.53
                  %Allowance
      for unfunded loan commitments/unfunded commitments
                  
                  
                  0.29
                  %
                  
                  
                  0.29
                  %Allowance
      for credit losses/total loans and leases
                  
                  
                  1.81
                  %
                  
                  
                  1.58
                  %





See “Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operation – Comparison of Operating Results-Three and Nine Months Ended
September 30, 2009 and 2008 – Provision for Credit Losses, Allowance for Credit
Losses, and Critical Accounting Policies – Loan Impairment and Allowance for
Credit Losses” for additional information about the provision for credit losses
and the allowance for credit losses as of September 30, 2009 and
2008.





5





Note 4. Comprehensive
Income.Comprehensive income includes net income and all other
changes to the Company's equity, with the exception of transactions with
shareholders ("other comprehensive income").  The Company's only
component of other comprehensive income is unrealized gains and losses on
available for sale securities.  Unrealized gains and losses on
available for sale securities is primarily impacted by purchases and sales of
available for sale securities and changes in interest rates between the
respective reporting periods.  Information concerning other
comprehensive income for the three and nine month periods ended September 30,
2009 and 2008 is as follows:





Three Months
                  Ended
                  09/30/09
                
                
                Three Months
                  Ended
                  09/30/08
                
                
                Nine Months
                  Ended
                  09/30/09
                
                
                Nine Months
                  Ended
                  09/30/08Net
      income
                
                $
                1,761,669
                
                
                $
                2,055,654
                
                
                $
                5,526,066
                
                
                $
                8,968,358Reclassification
      of gain on sale of securities
                
                
                0
                
                
                
                27,626
                
                
                
                917,866
                
                
                
                97,537Gains
      (losses) unrealized, net of income taxes
                
                
                815,478
                
                
                
                38,434
                
                
                
                (1,112,362
                )
                
                
                (210,333
                )Other
      comprehensive income (loss)
                
                
                815,478
                
                
                
                66,060
                
                
                
                (194,496
                )
                
                
                (112,796
                )Comprehensive
      income
                
                $
                2,577,147
                
                
                $
                2,121,714
                
                
                $
                5,331,570
                
                
                $
                8,855,562





Note 5.  Stock-Based
Compensation.The Company had two stock-based compensation
plans at September 30, 2009.  The shares outstanding are for grants
under the Company’s 1997 Stock Option Plan (the “1997 Plan”) and the 2008 Equity
Incentive Plan (the “2008 Plan”).  The 1997 Plan matured on April 8,
2008 and no additional options may be granted under the 1997 Plan.  At
September 30, 2009, the 1997 Plan had 130,220 granted unexercised shares. At
September 30, 2009, the 2008 Plan includes 44,500 granted unexercised shares and
913,500 shares available to be granted. During the three and nine months ended
September 30, 2009, no restricted shares were granted under the 2008
Plan.





Stock
options expire ten years from the date of grant and vest over service periods
ranging from one year to five years.  Options granted under the 2008
Plan are granted at the closing sales price of the Company’s common stock on the
NASDAQ Stock Market on the date of grant. The Company settles stock option
exercises with treasury shares.





The net
compensation benefits credited against expense for these plans was $74,036 and
$45,879 for the three and nine months ended September 30, 2009, compared to
compensation cost charged against income of $3,440 and $27,598 for the three and
nine months ended September 30, 2008.  Total recapture credits against
compensation expense due to forfeited options was $93,061 and $96,272 for the
three and nine months ended September 30, 2009, compared to $12,655 and $29,014
for the three and nine months ended September 30, 2008.  As of
September 30, 2009, total unrecognized compensation cost on granted
unexercised shares was $199,540. That cost is expected to be recognized during
the next 3.25 years.





The total
income tax benefit recognized for stock-based compensation cost was none for the
three and nine months ended September 30, 2009, compared to none and $452,317
for the three and nine months ended September 30, 2008.





The
average fair value of options granted during the three and nine months ended
September 30, 2009 was $4.96 and $4.17, compared to $2.60 and $2.36 during the
three and nine months ended September 30, 2008.  The fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in the three and nine months ended September 30, 2009 and
2008:




6




Three
                  Months
                  Ended
                  09/30/09
                
                
                Three Months
                  Ended
                  09/30/08
                
                
                Nine Months
                  Ended
                  09/30/09
                
                
                Nine Months
                  Ended
                  09/30/08Dividend
      growth rate
                
                
                5.3
                %
                
                
                11.8
                %
                
                
                5.3
                %
                
                
                11.8
                %Expected
      volatility
                
                
                37.1
                %
                
                
                28.6
                %
                
                
                36.6
                %
                
                
                24.0
                %Average
      risk-free interest rate
                
                
                3.1
                %
                
                
                3.4
                %
                
                
                2.8
                %
                
                
                3.3
                %Expected
      lives - years
                
                
                6
                
                
                
                6
                
                
                
                6
                
                
                
                6





A summary
of option activity under the Plan as of September 30, 2009 and 2008, and changes
during the three and nine month periods ended September 30, 2009 and 2008, is
presented below:





Options
                              Outstanding
                            
                            
                            Price
                            
                            
                            Aggregate
                              Intrinsic ValuePeriod Ended September 30, 2009:Outstanding
      at December 31, 2008
                            
                            
                            172,295
                            
                            
                            $
                            17.52Granted
                            
                            
                            15,000
                            
                            
                            $
                            9.73Forfeited
                            
                            
                            (1,375
                            )
                            
                            $
                            28.79Exercised
                            
                            
                            0
                            
                            
                            $
                            0.00Outstanding
      at March 31, 2009
                            
                            
                            185,920
                            
                            
                            $
                            16.81
                            
                            
                            $
                            (1,150,476
                            )Granted
                            
                            
                            3,000
                            
                            
                            $
                            10.71Forfeited
                            
                            
                            0
                            
                            
                            $
                            0.00Exercised
                            
                            
                            0
                            
                            
                            $
                            0.00Outstanding
      at June 30, 2009
                            
                            
                            188,920
                            
                            
                            $
                            16.71
                            
                            
                            $
                            (965,604
                            )Granted
                            
                            
                            15,500
                            
                            
                            $
                            12.80Forfeited
                            
                            
                            (27,200
                            )
                            
                            $
                            20.55Exercised
                            
                            
                            (2,500
                            )
                            
                            $
                            6.87Outstanding
      at September 30, 2009
                            
                            
                            174,720
                            
                            
                            $
                            15.91
                            
                            
                            $
                            (770,109
                            )Vested
      and Exercisable at September 30, 2009
                            
                            
                            109,062
                            
                            
                            $
                            15.41
                            
                            
                            $
                            (426,955
                            )Period Ended September 30,
      2008:Outstanding
      at December 31, 2007
                            
                            
                            255,919
                            
                            
                            $
                            13.90Granted
                            
                            
                            13,000
                            
                            
                            $
                            21.11Forfeited
                            
                            
                            (4,000
                            )
                            
                            $
                            33.00Exercised
                            
                            
                            (80,749
                            )
                            
                            $
                            5.41Outstanding
      at March 31, 2008
                            
                            
                            184,170
                            
                            
                            $
                            17.72
                            
                            
                            $
                            880,823Granted
                            
                            
                            6,000
                            
                            
                            $
                            19.26Forfeited
                            
                            
                            (1,500
                            )
                            
                            $
                            29.28Exercised
                            
                            
                            (9,750
                            )
                            
                            $
                            16.84Outstanding
      at June 30, 2008
                            
                            
                            178,920
                            
                            
                            $
                            17.72
                            
                            
                            $
                            (865,969
                            )Granted
                            
                            
                            5,000
                            
                            
                            $
                            17.27Forfeited
                            
                            
                            (10,875
                            )
                            
                            $
                            20.26Exercised
                            
                            
                            0
                            
                            
                            $
                            0.00Outstanding
      at September 30, 2008
                            
                            
                            173,045
                            
                            
                            $
                            17.55
                            
                            
                            $
                            (47,839
                            )Vested
      and Exercisable at September 30, 2008
                            
                            
                            125,645
                            
                            
                            $
                            15.61
                            
                            
                            $
                            209,188





The
following table summarizes additional information about the Company’s
outstanding options and exercisable options as of September 30, 2009, including
weighted-average remaining contractual term expressed in years ("Life") and
weighted average exercise price (“Price”):


7





Outstanding
                                        
                                        
                                        ExercisableRange of Exercise Price
                                        
                                        Shares
                                        
                                        
                                        Life
                                        
                                        
                                        Price
                                        
                                        
                                        Shares
                                        
                                        
                                        Price$5.50
      – 12.95
                                        
                                        
                                        71,283
                                        
                                        
                                        
                                        5.43
                                        
                                        
                                        $
                                        9.64
                                        
                                        
                                        
                                        37,783
                                        
                                        
                                        $
                                        8.23$14.97
      – 16.49
                                        
                                        
                                        36,562
                                        
                                        
                                        
                                        3.29
                                        
                                        
                                        $
                                        16.10
                                        
                                        
                                        
                                        36,562
                                        
                                        
                                        $
                                        16.10$16.77
      – 25.22
                                        
                                        
                                        52,625
                                        
                                        
                                        
                                        7.36
                                        
                                        
                                        $
                                        20.77
                                        
                                        
                                        
                                        25,667
                                        
                                        
                                        $
                                        20.24$26.17
      – 33.27
                                        
                                        
                                        14,250
                                        
                                        
                                        
                                        7.25
                                        
                                        
                                        $
                                        28.81
                                        
                                        
                                        
                                        9,050
                                        
                                        
                                        $
                                        28.97174,720
                                        
                                        
                                        
                                        5.71
                                        
                                        
                                        $
                                        15.91
                                        
                                        
                                        
                                        109,062
                                        
                                        
                                        $
                                        15.41





A summary
of nonvested option shares as of September 30, 2009 and 2008, and changes during
the three and nine month periods ended September 30, 2009 and 2008, is presented
below:





Shares
                            
                            
                            PricePeriod Ended September 30,
      2009:Nonvested
      at December 31, 2008
                            
                            
                            43,275
                            
                            
                            $
                            22.68Granted
                            
                            
                            15,000
                            
                            
                            $
                            9.73Forfeited
                            
                            
                            0
                            
                            
                            $
                            0.00Vested
                            
                            
                            (4,150
                            )
                            
                            $
                            24.22Nonvested
      at March 31, 2009
                            
                            
                            54,125
                            
                            
                            $
                            18.97Granted
                            
                            
                            3,000
                            
                            
                            $
                            10.71Forfeited
                            
                            
                            0
                            
                            
                            $
                            0.00Vested
                            
                            
                            (4,050
                            )
                            
                            $
                            23.34Nonvested
      at June 30, 2009
                            
                            
                            53,075
                            
                            
                            $
                            18.17Granted
                            
                            
                            15,500
                            
                            
                            $
                            12.80Forfeited
                            
                            
                            (1,000
                            )
                            
                            $
                            27.57Vested
                            
                            
                            (1,917
                            )
                            
                            $
                            19.36Nonvested
      at September 30, 2009
                            
                            
                            65,658
                            
                            
                            $
                            16.72Period Ended September 30,
      2008:Nonvested
      at December 31, 2007
                            
                            
                            53,975
                            
                            
                            $
                            24.38Granted
                            
                            
                            13,000
                            
                            
                            $
                            21.11Forfeited
                            
                            
                            (4,000
                            )
                            
                            $
                            33.00Vested
                            
                            
                            (4,650
                            )
                            
                            $
                            20.65Nonvested
      at March 31, 2008
                            
                            
                            58,325
                            
                            
                            $
                            23.10Granted
                            
                            
                            6,000
                            
                            
                            $
                            19.26Forfeited
                            
                            
                            0
                            
                            
                            $
                            0.00Vested
                            
                            
                            (12,425
                            )
                            
                            $
                            20.23Nonvested
      at June 30, 2008
                            
                            
                            51,900
                            
                            
                            $
                            23.34Granted
                            
                            
                            5,000
                            
                            
                            $
                            17.27Forfeited
                            
                            
                            (7,500
                            )
                            
                            $
                            21.78Vested
                            
                            
                            (2,000
                            )
                            
                            $
                            29.33Nonvested
      at September 30, 2008
                            
                            
                            47,400
                            
                            
                            $
                            22.69





The fair
value compensation cost recognition provisions for share based payments are
different from the recognition provisions and the intrinsic value method for
recording compensation cost. The following table reflects the net impact of fair
value compensation cost recognition on income before income taxes, net income,
basic earnings per share and diluted earnings per share for the three and nine
months ended September 30, 2009 and 2008:


8





Three
                  Months
                  Ended
                  09/30/09
                
                
                Three
                  Months
                  Ended
                  09/30/08
                
                
                Nine
                  Months
                  Ended
                  09/30/09
                
                
                Nine
                  Months
                  Ended
                  09/30/08Increase
      (decrease) net income before income taxes
                
                $
                74,036
                
                
                $
                (3,440
                )
                
                $
                45,879
                
                
                $
                (27,598
                )Increase
      (decrease) net income
                
                $
                74,036
                
                
                $
                (3,642
                )
                
                $
                45,879
                
                
                $
                (26,693
                )Increase
      (decrease) basic earnings per share
                
                $
                0.00
                
                
                $
                0.00
                
                
                $
                0.00
                
                
                $
                0.00Increase
      (decrease) diluted earnings per share
                
                $
                0.00
                
                
                $
                0.00
                
                
                $
                0.00
                
                
                $
                0.00





Note 6.  Fair Value
Hierarchy.  The table below presents Assets Measured at Fair
Value on a Recurring Basis categorized by the level of inputs used in the
valuation of each asset as of September 30, 2009:





Quoted Prices
                  In Active
                  Markets for
                  Identical Assets
                
                
                Significant
                  Other
                  Observable
                  Inputs
                
                
                Significant
                  Unobservable
                  InputsDescription
                
                9/30/2009
                
                
                (Level 1)
                
                
                (Level 2)
                
                
                (Level 3)Available
      for sale securities:Investment
                
                $
                5,431,669
                
                
                $
                -
                
                
                $
                5,431,669
                
                
                $
                -Mortgage-backed
                
                
                85,677,465
                
                
                
                -
                
                
                
                85,677,465
                
                
                
                -Other
      real estate owned
                
                
                12,474,026
                
                
                
                -
                
                
                
                12,474,026
                
                
                
                -Total
                
                $
                103,583,160
                
                
                $
                -
                
                
                $
                103,583,160
                
                
                $
                -





The table
below presents Assets Measured at Fair Value on a Non-Recurring Basis
categorized by the level of inputs used in the valuation of each asset as of
September 30, 2009:





Quoted Prices
                  In Active
                  Markets for
                  Identical Assets
                
                
                Significant
                  Other
                  Observable
                  Inputs
                
                
                Significant
                  Unobservable
                  InputsDescription
                
                9/30/2009
                
                
                (Level 1)
                
                
                (Level 2)
                
                
                (Level 3)Impaired
      loans, net of specific allowance
                
                $
                15,336,702
                
                
                $
                -
                
                
                $
                -
                
                
                $
                15,336,702Total
                
                $
                15,336,702
                
                
                $
                -
                
                
                $
                -
                
                
                $
                15,336,702





Quoted
market price for similar assets in active markets is the valuation technique for
determining fair value of available for sale securities. Unrealized gains on
available for sale securities are included in the “accumulated other
comprehensive income” component of the Stockholders’ Equity section of the
Consolidated Statements of Financial Condition.





Other
real estate owned acquired through loan foreclosure is recorded at fair value
based on the appraised market value of the property based on sales of similar
assets. The fair value may be subsequently reduced if the estimated fair value
declines below the original appraised value. There were $449,000 and $1,815,000
of fair value adjustments made to other real estate owned during the three and
nine months ended September 30, 2009.





Impaired
loans are recorded at fair value based on the fair value of the collateral if it
is probable that scheduled principal or interest payments become uncollectible
when due according to the contractual terms of the loan agreement. In
determining if a loan is impaired, the Bank conducts a thorough review of
significant loans including loan payment status, borrowers' financial data and
operating factors such as cash flows, operating income or loss, etc. There was
$3,829,000 of specific allowances associated with impaired loans as of September
30, 2009.




9




There
were no liabilities measured at fair value on a recurring basis during the three
and nine months ended September 30, 2009 and 2008.





Net gains
(losses) realized and included in earnings for the three and nine months ended
September 30, 2009 and 2008 are reported in non-interest income as
follows:


Three
                  Months
                  Ended
                  09/30/09
                
                
                Three
                  Months
                  Ended
                  09/30/08
                
                
                Nine
                  Months
                  Ended
                  09/30/09
                
                
                Nine
                  Months
                  Ended
                  09/30/08Gain
      (loss) on sale of other real estate owned, net
                
                $
                (86,875
                )
                
                $
                (3,664
                )
                
                $
                (161,323
                )
                
                $
                96,837





Item
2.  Management's Discussion and Analysis of Financial Condition and
Results of Operation.


First
South Bancorp, Inc. (the "Company") was formed for the purpose of issuing common
stock and owning 100% of the stock of First South Bank (the "Bank") and
operating through the Bank a commercial banking business.  Therefore,
the discussion below focuses primarily on the Bank's results of
operations.  The Bank has one significant operating segment, the
providing of general commercial banking services to its markets located in the
state of North Carolina.  The Company’s common stock is traded on the
NASDAQ Global Select Market under the symbol "FSBK".





Comparison of Financial Condition at
September 30, 2009 and December 31, 2008.Total assets were
$855.9 million at September 30, 2009 compared to $875.9 million at December 31,
2008. Earning assets were $790.7 million at September 30, 2009 compared to
$808.6 million at December 31, 2008, reflecting the net change in the
composition of earning assets, as further discussed below. Earning assets were
92.4% of total assets at September 30, 2009 compared to 92.3% at December 31,
2008.





Interest-bearing
overnight deposits in financial institutions increased to $24.9 million at
September 30, 2009, from $5.8 million at December 31, 2008, reflecting the
reinvestment of proceeds from maturities and sales of investment securities.
Overnight funds are available to fund loan originations, liquidity management
activities and daily operations of the Bank.





Investment
securities available for sale declined to $5.4 million at September 30, 2009,
from $36.6 million at December 31, 2008.   Maturities of
investment securities available for sale were $5.0 million for the three months
ended September 30, 2009 and $15.0 million during the nine months ended
September 30, 2009.  The Bank sold no investment securities available
for sale during the three months ended September 30, 2009, however, during the
nine months ended September 30, 2009, $20.9 million were sold, compared to none
sold during the three and nine months ended September 30, 2008. Portions of the
proceeds from investment maturities and sales were used to fund maturing
borrowings, the decline in deposits or reinvested into interest-bearing
overnight deposits.





Mortgage-backed
securities available for sale increased to $85.7 million at September 30, 2009
from $32.0 million at December 31, 2008. The Bank securitizes certain mortgage
loans held for sale into mortgage-backed securities to support a more balanced
sensitivity to future interest rate changes and to maintain sufficient liquidity
levels.  During the three and nine months ended September 30, 2009,
$5.7 million and $62.0  million of mortgage loans held for sale were
securitized into mortgage-backed securities available for sale; compared to none
for the three months and $4.0 million for the nine months ended September 30,
2008.





Mortgage-backed
securities held for investment were $597,000 at September 30, 2009, compared to
$832,000 at December 31, 2008, reflecting scheduled principal
payments.




10




Based on
current market prices, investment and mortgage-backed securities available for
sale declined in market value by a net of $194,000 at September 30, 2009 from
December 31, 2008. See “Note 4. Comprehensive Income” of “Notes to Consolidated
Financial Statements (Unaudited)” for additional information.




Loans
held for sale were $7.4 million at September 30, 2009 compared to $5.6 million
at December 31, 2008.  Proceeds from loan sales were $15.6 million and
$25.4 million for the three and nine months ended September 30, 2009, compared
to $10.1 and $33.5 million sold during the three and nine months ended September
30, 2008. The proceeds from loans sold during the three and nine months ended
September 30, 2009 were used to fund liquidity needs of the Bank, including loan
originations, repayment of borrowings, deposit outflows and general operations
of the Bank.  Loans serviced for others were $281.9 million at
September 30, 2009, compared to $255.5 million at December 31,
2008.





Net loans
and leases receivable held for investment declined to $674.3 million at
September 30, 2009 from $739.2 million at December 31, 2008. During the three
and nine months ended September 30, 2009, certain loans held for investment were
subjects of foreclosure and transferred to other real estate owned, as discussed
below. In addition, a portion of the proceeds from principal repayments on loans
held for investment was used to fund the liquidity needs of the
Bank.





Non-accrual
loans improved to $7.1 million at September 30, 2009, from $10.7 million at
December 31, 2008, reflecting management’s efforts of managing problem assets
and improving the Bank’s credit quality.  Restructured loans were $4.3
million at both September 30, 2009 and December 31, 2008.  The level
of non-accrual and restructured loans is primarily attributable to the current
economic environment.  Downward pressure has impacted the market
values of housing and other real estate, significantly impacting property values
in the Bank’s market area and credit quality of certain borrowers. Management
believes it has thoroughly evaluated its non-performing loans and they are
either well collateralized or adequately reserved. However, there can be no
assurance in the future that regulators, increased risks in the loan portfolio,
adverse changes in economic conditions or other factors will not require further
adjustments to the allowance for credit losses.





Other
real estate owned increased to $12.5 million at September 30, 2009 from $7.7
million at December 31, 2008, reflecting foreclosures of certain real estate
properties, net of sales. Other real estate owned consists of residential and
commercial properties, developed building lots and a developed residential
subdivision.  During the three and nine months ended September 30,
2009, the Bank recorded $449,000 and $1.8 million of fair value adjustments to
other real estate owned, compared to $462,000 and $533,000 of fair value
adjustments made during the three and nine months ended September 30, 2008. The
Bank believes the adjusted carrying values of these properties are
representative of their fair market values, although there can be no assurances
that the ultimate sales will be equal to or greater than the carrying
values.  See “Note 6.  Fair Value Hierarchy” of “Notes to
Consolidated Financial Statements (Unaudited)” for additional
information.





Total
deposits declined to $709.9 million at September 30, 2009 from $716.4 million at
December 31, 2008.  Demand accounts (personal and business checking
accounts and money market accounts) declined to $220.0 million at September 30,
2009 from $223.4 million at December 31, 2008, while time deposits and savings
accounts declined to $489.8 million at September 30, 2009 from $493.1 million at
December 31, 2008.  During the three and nine months ended September
30, 2009, the Bank began repricing certain new and maturing time deposits at
lower rates, and combined with the current volume of lower costing checking
accounts, is effectively managing its deposit cost.





Borrowed
money consisting of FHLB advances and repurchase agreements declined to $39.0
million at September 30, 2009 from $52.6 million at December 31,
2008.  FHLB advances were $35.0 million at September 30, 2009 and
$45.0 million at December 31, 2008. They are fixed rate advances with a weighted
average cost of 3.0% and remaining terms ranging from 4 to 16 months, which the
Bank has used as a long-term source of funds.  Repurchase agreements
(cash management accounts for commercial banking customers) were $4.0 million at
September 30, 2009, compared to $7.6 million at December 31, 2008.




11




Stockholders'
equity was $87.3 million at September 30, 2009 and $87.8 million at December 31,
2008.  The equity to assets ratio was 10.2% at September 30, 2009 and
10.0% at December 31, 2008, reflecting the net effect of year-to-date earnings,
dividend payments, stock option exercises, common stock purchases, the change in
accumulated other comprehensive income and the change in the volume of assets.
See "Consolidated Statements of Stockholders' Equity" for additional
information.





Accumulated
other comprehensive income was $985,000 at September 30, 2009 compared to $1.2
million at December 31, 2008, reflecting the change in net market value and mix
of the investment portfolio based on current market prices.  See “Note
4. Comprehensive Income” of “Notes to Consolidated Financial Statements
(Unaudited)” for additional information.





The Bank
is subject to various capital requirements administered by federal and state
banking agencies. As of September 30, 2009, the Bank's regulatory capital ratios
were in excess of all regulatory requirements and are as follows: Total
Risk-Based Capital – 13.2%; Tier 1 Risk-Based Capital – 11.9 %; and Tier 1
Leverage Capital – 9.3%.  See "Liquidity and Capital Resources" below
for additional information.





On
September 24, 2009, the Company declared a cash dividend of $0.20 per share,
payable October 22, 2009 to stockholders of record as of October 7,
2009.  This dividend payment represents a 111.1% payout ratio of the
basic earnings per share for the quarter ended September 30, 2009, and is the
Company's fiftieth consecutive quarterly cash dividend.





The
Company purchased no shares of its common stock during the three and nine months
ended September 30, 2009, compared to 15,000 and 140,241 purchased during the
three and nine months ended September 30, 2008.  Common stock may be
purchased through both private and open market transactions pursuant to a stock
repurchase plan adopted by the board of directors. Shares acquired through a
repurchase plan are held as treasury stock, at cost. There were 1,513,626
treasury shares held at September 30, 2009 totaling $32.2 million, compared to
1,516,126 held at December 31, 2008 totaling $32.2 million.  Treasury
shares are used for general corporate purposes including the exercise of stock
options and providing shares for potential future stock splits. There were 2,500
shares issued from the exercise of stock options during the three and nine
months ended September 30, 2009, compared to no shares issued during the three
months and 90,499 shares issued during the nine months ended September 30,
2008.





Comparison of Operating Results -
Three and Nine Months Ended September 30, 2009 and 2008.Net
income for the three and nine months ended September 30, 2009 was $1.8 million
and $5.5 million, compared to $2.1 million and $9.0 million for the three and
nine months ended September 30, 2008. Diluted earnings per share were $0.18 and
$0.57 per share for the three and nine months ended September 30, 2009, compared
to $0.21 and $0.93 per share for the three and nine months ended September 30,
2008.




The
decline in net earnings during the three and nine months ended
September  30, 2009 results primarily from: a reduction in net
interest income which has been significantly impacted by declining interest
rates during the comparative reporting periods; changes in the volume of earning
and non-earning assets between the respective reporting periods; the volume
of  provisions for credit losses required to replenish net charge-offs
and strengthen the allowance for credit losses; and increased FDIC insurance
premiums related to increased risk based assessment rates and an industry wide
mandatory special assessment;  while being partially offset by a
decline in the cost of funds and a consistent level of non-interest
income.




12




The Bank
continues to face challenges resulting from the impact of the current economy on
the housing and real estate markets.  The Bank continues to monitor
and evaluate all significant loans in its portfolio, and will continue to manage
its credit risk exposure in anticipation of future stabilization of the real
estate market.  Management believes competition and pricing pressures
will continue on both deposits and loans during the remainder of 2009 and into
2010.  The amount and timing of any future Federal Reserve rate
adjustment remain uncertain, and may further impact the Bank if those
adjustments are significant.





Key
performance ratios are return on average assets (ROA), return on average equity
(ROE), and efficiency.  ROA was .8% for both the three and nine months
ended September 30, 2009, compared to 0.9% and 1.3% for the three and nine
months ended September 30, 2008.  ROE was 8.1% and 8.4% for the three
and nine months ended September 30, 2009, compared to 9.4% and 13.7% for the
three and nine months ended September 30, 2008.  The efficiency ratio
was 61.1% and 58.5% for the three and nine months ended September 30, 2009,
compared to 55.3% and 50.9% for the three and nine months ended September 30,
2008.





Interest
Income.Interest income was $12.2 million and $37.2 million
for the three and nine months ended September 30, 2009, compared to $14.4
million and $46.0 million for the three and nine months ended September 30,
2008. The reduction in interest income volume is due primarily to the decline in
interest rates during the comparative reporting periods and a decline in the
volume of average interest-earning assets. Average interest-earning assets were
$801.6 million and $809.1 million for the three and nine months ended September
30, 2009, compared to $830.8 million and $846.9 million for the three and nine
months ended September 30, 2008.  The reduction in average
interest-earning assets reflects the net impact of the decrease in loans held
for investment, sales and maturities of investment securities and mortgage
backed securities, the increase in other real estate owned and the volume of
non-performing loans discussed above.  The yield on average
interest-earning assets was 6.1% for both the three and nine months ended
September 30, 2009, compared to 6.9% and 7.2% for the three and nine months
ended September 30, 2008.   The yield on average interest-earning
assets has been directly impacted by the decline in interest rates and average
interest-earning assets during the comparative reporting periods as discussed
above.





Interest
Expense.Interest expense declined to $3.9 million and $13.1
million for the three and nine months ended September 30, 2009, compared to $5.4
million and $18.2 million for the three and nine months ended September 30,
2008, reflecting a decline in interest rates between the comparative reporting
periods and a decline in the volume of average interest-bearing
liabilities.  The effective cost of funds was 2.0% and 2.2% for the
three and nine months ended September 30, 2009, compared to 2.7% and 3.0% for
the three and nine months ended September 30, 2008.  The Company was
able to improve its cost of funds by the combination of deposit repricing, and
the rollover of maturing time deposits and the repositioning of borrowings
within the current lower interest rate environment.  Average deposits
and borrowings were $771.9 million and $778.1 million for the three and nine
months ended September 30, 2009, compared to $799.7 million and $811.9 million
for the three and nine months ended September 30, 2008.





Net Interest
Income.  Net interest income was $8.3 million and $24.1 million
for the three and nine months ended September 30, 2009, compared to $9.0 million
and $27.8 million for the three and nine months ended September 30,
2008.  The interest rate spread (the difference between the effective
yield on average earning assets and the effective cost of average deposits and
borrowings) was 4.1% and 3.9% for the three and nine months ended September 30,
2009, compared to 4.2% for both the three and nine months ended September 30,
2008. The net yield on interest-earning assets (net interest income divided by
average interest-earning assets) was 4.1% and 4.0% for the three and nine months
ended September 30, 2009, compared to 4.3% and 4.4% for the three and nine
months ended September 30, 2008. The decline in interest rate spread and net
yield on interest-earning assets is a direct result of those same events
impacting interest income and interest expense as discussed above.




13




Provision for Credit
Losses.  The Bank's methodology for determining its provision
for credit losses includes amounts specifically allocated to credits that are
individually determined to be impaired, as well as general provisions allocated
to groups of loans that have not been individually assessed for
impairment.  The Bank recorded $1.3 million and $4.5 million of
provisions for credit losses in the three and nine months ended September 30,
2009, compared to $1.7 million and $2.9 million in the three and nine months
ended September 30, 2008, reflecting the current volume of non-performing loans
as previously discussed. The provision for credit losses was necessary to
replenish net charge offs of $668,000 and $3.9 million recorded in the three and
nine months ended September 30, 2009 compared to $431,000 and $1.1 million in
the three and nine months ended September 30, 2008, and to strengthen the
allowance for credit losses in anticipation of continued economic
uncertainty.





Allowance for Credit
Losses.The Bank maintains general and specific allowances for
loan and lease losses and unfunded loan commitments (collectively the “allowance
for credit losses”) at levels the Bank believes are adequate to absorb probable
losses inherent in the loan and lease portfolio and in unfunded loan
commitments.  The Bank has developed policies and procedures for
assessing the adequacy of the allowance for credit losses that reflect the
assessment of credit risk and impairment analysis.  This assessment
includes an analysis of qualitative and quantitative trends in the levels of
classified loans.  In developing this analysis, the Bank relies on
estimates and exercises judgment in assessing credit risk. Future assessments of
credit risk may yield different results, depending on changes in the qualitative
and quantitative trends, which may require increases or decreases in the
allowance for credit losses.





The Bank
has not changed its practices related to the determination of the adequacy of
the allowance for credit losses.  The Bank uses a variety of modeling
and estimation tools for measuring credit risk and performing impairment
analysis, which is the basis used in developing the allowance for credit
losses.  The factors supporting these allowances do not diminish the
fact that the entire allowance for credit losses is available to absorb probable
losses in both the loan and leases portfolio and in unfunded loan
commitments.  The Bank’s principal focus is on the adequacy of the
total allowance for credit losses.  Based on the overall credit
quality of the loan and lease receivable portfolio, the Bank believes it has
established the allowance for credit losses pursuant to generally accepted
accounting principles, and has taken into account the views of its regulators
and the current economic environment.  Management of the Bank reassess
the information upon which it bases the allowance for credit losses quarterly
and believes their accounting decisions remain accurate. However, there can be
no assurance in the future that regulators, increased risks in its loans and
leases portfolio, changes in economic conditions and other factors will not
require additional adjustments to the allowance for credit losses.





The
allowance for credit losses was $12.6 million at September 30, 2009, compared to
$12.0 million December 31, 2008. The ratio of the allowance for credit losses to
loans and leases was 1.8% at September 30, 2009 and 1.6% December 31,
2008.  For additional information, see “Note 3. Allowance for Credit
Losses” of “Notes to Consolidated Financial Statements (Unaudited)” and
“Critical Accounting Policies”.





Noninterest
Income.Noninterest income was $2.4 million and $8.4 million
for the three and nine months ended September 30, 2009, compared to $2.4 million
and $7.9 million for the three and nine months ended September 30,
2008.  Noninterest income consists of fees, service charges and
servicing fees earned on loans, service charges and insufficient funds fees
collected on deposit accounts, gains from loan and securities sales and other
miscellaneous income.





The Bank
strives to maintain a consistent level of noninterest income across both loan
and deposit service offerings. Fees, service charges and servicing fees
collected were $2.0 million and $6.0 million for the three and nine months ended
September 30, 2009, compared to $2.1 million and $6.4 million for the three and
nine months ended September 30, 2008. Fees, service charges earned and
insufficient funds fees collected during each period are attributable to the
volume of loan, deposit account, and insufficient funds transactions processed
during each period, and the collection of related fees and service
charges.




14




The Bank
recorded gains from loan sales and mortgage-backed securities of $247,000 and
$935,000 during the three and nine months ended September 30, 2009, compared to
$136,000 and $610,000 during the three and nine months ended September 30, 2008.
The Bank sells certain fixed-rate residential mortgage loans and mortgage-backed
securities to better manage market risk exposure for a more balanced sensitivity
to future interest rate changes.  The Bank recorded no gains from
investment security sales during the three months ended September 30, 2009 and
$918,000 during the nine months ended September 30, 2009, compared to no
investment security sales in the three and nine months ended September 30,
2008.





Noninterest
Expense.Noninterest expenses were $6.5 million and $19.0
million for the three and nine months ended September 30, 2009, compared to $6.3
million and $18.2 million for the three and nine months ended September 30,
2008.  The largest component is compensation and fringe benefits at
$3.5 million and $10.5 million for the three and nine months ended September 30,
2009, compared to $3.4 million and $10.4 million for the three and nine months
ended September 30, 2008, reflecting the Bank’s efforts in managing its human
resources cost.





FDIC
insurance premiums increased to $275,000 and $955,000 for the three and nine
months ended September 30, 2009, from $109,000 and $153,000 for the three and
nine months ended September 30, 2008, reflecting an industry wide mandatory
special assessment totaling $400,000 at June 30, 2009 and increased risk based
assessment rates.  In addition, one-time FDIC insurance assessment
credits received under the Federal Deposit Reform Act of 2005 were exhausted in
the quarter ended June 30, 2008.





Expenses
attributable to the increase of other real estate owned were $394,000 and
$737,000 in the three and nine months ended September 30, 2009, compared to
$501,000 and $612,000 in the three and nine months ended September 30,
2008.  Other noninterest expenses including premises and equipment,
advertising, data processing, repairs and maintenance, office supplies,
professional fees, taxes and insurance, etc., have remained relatively flat
during the respective periods.





Income
Taxes.Income tax expense was $1.1 million and $3.5 million
for the three and nine months ended September 30, 2009, compared to $1.3 million
and $5.6 million for the three and nine months ended September 30,
2008.  Changes in amounts of income tax provisions reflect changes in
pretax income and estimated income tax rates in effect during each
period.  Effective income tax rates were 38.9% and 38.7% for the three
and nine months ended September 30, 2009, compared to 38.7% and 38.6% for the
three and nine months ended September 30, 2008.  See “Critical
Accounting Policies” for additional information.





Liquidity and Capital
Resources.Liquidity generally refers to the Bank's ability to
generate adequate amounts of funds to meet its cash needs.  Adequate
liquidity guarantees that sufficient funds are available to meet deposit
withdrawals, fund future loan commitments, maintain adequate reserve
requirements, pay operating expenses, provide funds for debt service, pay
dividends to stockholders, and meet other general commitments.  The
Bank must maintain certain regulatory liquidity requirements of liquid assets to
deposits and short-term borrowings.  At September 30, 2009, the Bank
had cash, deposits in banks, investment securities, mortgage-backed securities
and loans held for sale totaling $140.4 million, compared to $101.7 million at
December 31, 2008, representing 19.0% and 13.9% of deposits and short-term
borrowings for the respective periods.




15




The Bank
believes it can meet future liquidity needs with existing funding
sources.  The Bank's primary sources of funds are deposits, payments
on loans and mortgage-backed securities, maturities of investment securities,
earnings and funds provided from operations, the ability to borrow from the FHLB
of Atlanta and the availability of loans held for sale.  While
scheduled repayments of loans and mortgage-backed securities are relatively
predictable sources of funds, deposit flows and general market interest rates,
economic conditions and competition substantially influence loan prepayments. In
addition, the Bank manages its deposit pricing in order to maintain a desired
deposit mix.





The FDIC
requires the Bank to meet a minimum leverage capital requirement of Tier 1
capital (consisting of retained earnings and common stockholder’s equity, less
any intangible assets) to assets ratio of 4%.  The FDIC also requires
the Bank to meet a ratio of total capital to risk-weighted assets of 8%, of
which at least 4% must be in the form of Tier 1 capital.  The North
Carolina Office of the Commissioner of Banks requires the Bank to maintain a
capital surplus of not less than 50% of common capital stock.  The
Bank was in compliance with all regulatory capital requirements at September 30,
2009 and December 31, 2008.





Critical Accounting
Policies.The Company has identified the policies below as
critical to its business operations and the understanding of its results of
operations.  The impact and any associated risks related to these
policies on the Company’s business operations is discussed throughout
Management’s Discussion and Analysis of Financial Condition and Results of
Operations where such policies affect reported and expected financial
results.





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





Loan Impairment and
Allowance for Credit Losses.  A loan or lease is considered
impaired, based on current information and events, if it is probable that the
Bank will be unable to collect the scheduled payments of principal or interest
when due according to the contractual terms of the loan or lease agreement.
Uncollateralized loans are measured for impairment based on the present value of
expected future cash flows discounted at the historical effective interest rate,
while all collateral-dependent loans are measured for impairment based on the
fair value of the collateral.  The Bank uses several factors in
determining if a loan or lease is impaired.  The internal asset
classification procedures include a thorough review of significant loans, leases
and lending relationships and include the accumulation of related
data.  This data includes loan and lease payment status, borrowers'
financial data and borrowers' operating factors such as cash flows, operating
income or loss, etc.





The
allowance for credit losses is increased by charges to income and decreased
by charge-offs (net of recoveries).  Management's periodic evaluation
of the adequacy of the allowance for credit losses is based on past loan and
lease loss experience, known and inherent risks in loans and leases and unfunded
loan commitments, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral, and current economic
conditions.  While management believes that it has established the
allowances for credit losses in accordance with accounting principles generally
accepted in the United States of America and has taken into account the views of
its regulators and the current economic environment, there can be no assurance
in the future that regulators or risks in its loans and leases and unfunded loan
commitments will not require additional adjustments to the allowance for credit
losses.





Income Taxes.Deferred tax asset and
liability balances are determined by application to temporary differences the
tax rate expected to be in effect when taxes will become payable or receivable.
Temporary differences are differences between the tax basis of assets and
liabilities and their reported amounts in the financial statements that will
result in taxable or deductible amounts in future years.  The effect
on deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date.


16





Off-Balance Sheet
Arrangements.The Company is a party to financial instruments
with off-balance sheet risk in the normal course of business to meet the
financing needs of its customers and to reduce its own exposure to fluctuations
in interest rates.  These financial instruments include commitments to
extend credit and involve, to varying degrees, elements of credit and interest
rate risk in excess of the amount recognized in the balance
sheet.  The Company's exposure to credit loss in the event of
non-performance by the other party to the financial instrument for commitments
to extend credit is represented by the contractual amount of those instruments.
The Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.





Forward Looking
Statements.The Private Securities Litigation Reform Act of
1995 states that disclosure of forward looking information is desirable for
investors and encourages such disclosure by providing a safe harbor for forward
looking statements by corporate management. This Form 10-Q, including
Management’s Discussion and Analysis of Financial Condition and Results of
Operations, contains forward looking statements that involve risk and
uncertainty.  In order to comply with terms of the safe harbor, the
Company notes that a variety of risks and uncertainties could cause its actual
results and experience to differ materially from anticipated results or other
expectations expressed in the Company's forward looking
statements.  There are risks and uncertainties that may affect the
operations, performance, development, growth projections and results of the
Company's business.  They include, but are not limited to, economic
growth, interest rate movements, timely development of technology enhancements
for products, services and operating systems, the impact of competitive
products, services and pricing, customer requirements, regulatory changes and
similar matters.  Readers of this report are cautioned not to place
undue reliance on forward looking statements that are subject to influence by
these risk factors and unanticipated events, as actual results may differ
materially from management's expectations.





Accounting Standards
Codification.  In June 2009, the Financial Accounting Standards
Board (the “FASB”) issued Statement of Financial Accounting Standards No. 168
(“SFAS No. 168”), “The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles-a replacement of FASB
Statement No. 162.” The FASB Accounting Standards Codification will become the
source of authoritative U.S. GAAP recognized by the FASB to be applied to
nongovernmental entities.





Following
this Statement, the FASB Board will not issue new standards in the form of
Statements, FASB Staff Positions, or Emerging Issues Task Force
Abstracts.  Instead, they will issue Accounting Standards Updates. The
Board will not consider Accounting Standards Updates as authoritative in their
own right.  Accounting Standards Updates will serve only to update the
Codification, provide background information about the guidance and provide the
basis for conclusions on the change(s) in the Codification.





This
statement will replace SFAS No. 162 and modifies the GAAP hierarchy into two
levels: authoritative and non-authoritative. This statement is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. The Company adopted SFAS No. 168 on September 30, 2009, with
no material impact on its consolidated financial statements.





Going
forward, as the FASB issues Accounting Standards Updates, the Company will
evaluate the impact that such updates may have on its consolidated financial
statements of the Company and will also monitor the effective dates of such
updates.


17





Item 3.  Quantitative and
QualitativeDisclosures
about Market Risk.Market risk is
the possible chance of loss from unfavorable changes in market prices and
rates.  These changes may result in a reduction of current and future
period net interest income, which is the favorable spread earned from the excess
of interest income on interest-earning assets over interest expense on
interest-bearing liabilities.





The
Company considers interest rate risk to be its most significant market risk,
which could potentially have the greatest impact on operating
earnings.  The structure of the Company's loan and deposit portfolios
is such that a significant decline in interest rates may have a negative impact
on net market values and net interest income.  The Company monitors
whether material changes in market risk have occurred since December 31,
2008.  The Company believes that an adverse change in market risk
exposure has occurred since December 31, 2008.





As has
most of the banking industry, the Bank has experienced intense price competition
for both loans and deposits.  This has been a contributing factor to
net interest margin compression in the three and nine months ended September 30,
2009, which has been significantly influenced by the Federal Reserve’s 4.0% rate
cuts between December 31, 2007 and December 31, 2008. The Bank is an
asset-sensitive bank and consequently, the Federal Reserve’s aggressive series
of rate cuts has caused an immediate downward pricing of its loan portfolio,
while outpacing the ability to reduce its funding cost as
rapidly.  With the current federal funds rate at 0% to 0.25%, it is
not foreseeable that interest rates can decline farther. Over the remainder of
2009, the Bank anticipates some improvement in its net interest margin as
maturing time deposits begin to reprice at lower rates, although there are no
guarantees or assurances that this will occur.





Item 4.  Controls and
Procedures.As of the end of the
period covered by this report, management of the Company carried out an
evaluation, under the supervision and with the participation of the Company’s
principal executive officer and principal financial officer, of the
effectiveness of the Company’s disclosure controls and procedures. Based on this
evaluation, the Company’s principal executive officer and principal financial
officer concluded to the best of their knowledge and belief that the Company’s
disclosure controls and procedures are effective in ensuring that information
required to be disclosed by the Company in reports that it files or submits
under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission’s rules and forms. It should be noted that the design of the
Company’s disclosure controls and procedures is based in part upon certain
reasonable assumptions about the likelihood of future events, and there can be
no reasonable assurance that any design of disclosure controls and procedures
will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote, but the Company’s principal executive and
financial officers have concluded to the best of their knowledge and belief that
the Company’s disclosure controls and procedures are, in fact, effective at a
reasonable assurance level.





In
addition, there have been no changes in the Company’s internal control over
financial reporting (to the extent that elements of internal control over
financial reporting are subsumed within disclosure controls and procedures)
identified in connection with the evaluation described in the above paragraph
that occurred during the Company’s last fiscal quarter, that has materially
affected, or is reasonably likely to materially affect, the Company’s internal
control over financial reporting.




18





PART
II.  OTHER INFORMATION





Item l.  Legal Proceedings:The Company is currently not engaged in any material legal
proceedings.  From time to time, the Bank is a party to legal
proceedings within the ordinary course of business wherein it enforces its
security interest in loans, and other matters of similar nature.





Item 2.  Unregistered Sales
of Equity Securities and Use of Proceeds:The following table sets forth
information regarding the Company's repurchases of its Common Stock during the
quarter ended September 30, 2009.


Total Numberof SharesPurchased
                              
                              
                              Maximumas Part of
                              
                              
                              Number of SharesTotal
                              
                              
                              
                              
                              
                              Publicly
                              
                              
                              that May Yet BeNumber of
                              
                              
                              Average
                              
                              
                              Announced
                              
                              
                              Purchased UnderShares
                              
                              
                              Price Paid
                              
                              
                              Plans or
                              
                              
                              the Plans orPeriod
                              
                              Purchased
                              
                              
                              per Share
                              
                              
                              Programs (1)
                              
                              
                              Programs (1)July  2009Beginning
      date: July 1
                              
                              
                              -0-
                              
                              
                              
                              -0-
                              
                              
                              
                              -0-
                              
                              
                              
                              486,905Ending
      date: July 31August
      2009Beginning
      date: August 1
                              
                              
                              -0-
                              
                              
                              
                              -0-
                              
                              
                              
                              -0-
                              
                              
                              
                              486,905Ending
      date: August 31September
      2009Beginning
      date: September 1
                              
                              
                              -0-
                              
                              
                              
                              -0-
                              
                              
                              
                              -0-
                              
                              
                              
                              486,905Ending
      date: September 30


(1)
              A
      total of 486,905 shares of common stock may be purchased pursuant to a
      stock repurchase program announced on January 26, 2009.  This
      repurchase program will expire on January 25,
  2010.





Item 3.  Defaults Upon
Senior Securities:Not applicable





Item 4.  Submission of
Matters to a Vote of Security Holders:None





Item 5.  Other Information:Not applicable





Item 6.  Exhibits:The following exhibits are filed herewith:





Number
                
                Title31.1
                
                Rule
      13a-14(a) Certification of Chief Executive Officer31.2
                
                Rule
      13a-14(a) Certification of Chief Financial Officer32
                
                Section
      1350 Certification




19




SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





FIRST
      SOUTH BANCORP, INC./s/ William L. Wall
              
              /s/ Kristie W. HawkinsWilliam
      L. Wall
              
              Kristie
      W. HawkinsExecutive
      Vice President
              
              ControllerChief
      Financial Officer
              
              Treasurer(Principal
      Financial Officer)
              
              (Principal
      Accounting Officer)Date:
      November 4, 2009
              
              Date:
      November 4, 2009


20