UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

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

                   For the fiscal year ended December 31, 2008
                        Commission File Number 000-22787

                             FOUR OAKS FINCORP, INC.
             (Exact name of registrant as specified in its charter)

              North Carolina                             56-2028446
              --------------                             ----------
     (State or other jurisdiction of            (IRS Employer Identification
      incorporation or organization)                       Number)

          6114 U.S. 301 South
       Four Oaks, North Carolina                            27524
       -------------------------                            -----
(Address of principal executive offices)                  (Zip Code)

       Registrant's telephone number, including area code: (919) 963-2177
                                                           --------------

           Securities registered under Section 12(b) of the Act: NONE
             Securities registered under Section 12(g) of the Act:

                     Common Stock, par value $1.00 per share
                     ---------------------------------------
                                (Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. YES | | NO |X|

Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. YES | | NO |X|

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
|X| YES | | NO

Indicate by check mark whether disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. | |

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
definitions of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer  | |                     Accelerated filer |X|
Non-accelerated filer | |                        Smaller reporting company | |
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act): | | YES |X| NO

                                   $84,360,731
                                   -----------
       (Aggregate market value of voting and non-voting common equity held
            by non-affiliates of the registrant based on the price at
         which the registrant's Common Stock, par value $1.00 per share
                           was sold on June 30, 2008)

                                    6,207,191
                                    ---------
(Number of shares of Common Stock, par value $1.00 per share, outstanding as of
March 6, 2009)

Documents Incorporated by Reference                       Where Incorporated
-----------------------------------                       ------------------
(1)  Proxy Statement for the 2009 Annual                  Part III
     Meeting of Shareholders to be held May 11, 2009

                                       - 1 -
<PAGE>

Forward Looking Information

         Information set forth in this Annual Report on Form 10-K under the
caption "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains various "forward looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
which statements represent our judgment concerning the future and are subject to
business, economic and other risks and uncertainties, both known and unknown,
that could cause our actual operating results and financial position to differ
materially. Such forward looking statements can be identified by the use of
forward looking terminology, such as "may," "will," "expect," "anticipate,"
"estimate," or "continue" or the negative thereof or other variations thereof or
comparable terminology.

         We caution that any such forward looking statements are further
qualified by important factors that could cause our actual operating results to
differ materially from those in the forward looking statements, including,
without limitation, the effects of future economic conditions, governmental
fiscal and monetary policies, legislative and regulatory changes, the risks of
changes in interest rates on the level and composition of deposits, the effects
of competition from other financial institutions, the failure of assumptions
underlying the establishment of the allowance for possible loan losses and the
low trading volume of our common stock and the risks discussed in Item 1A. Risk
Factors below.

         Any forward looking statements contained in this Annual Report on Form
10-K are as of the date hereof and we undertake no duty to update them if our
view changes later. These forward looking statements should not be relied upon
as representing our view as of any date subsequent to the date hereof.

                                     PART I

Item 1 - Business.

          Four Oaks Bank & Trust Company (referred to herein as the "bank") was
incorporated under the laws of the State of North Carolina in 1912. On February
5, 1997, the bank formed Four Oaks Fincorp, Inc. (referred to herein as the
"Company"; references herein to "we," "us" and "our" refer to the Company and
its consolidated subsidiaries, unless the context otherwise requires) for the
purpose of serving as a holding company for the bank. Our corporate offices and
banking offices are located in eastern and central North Carolina. We have no
significant assets other than cash, the capital stock of the bank and its
membership interest in Four Oaks Mortgage Services, L.L.C., as well as
$3,189,000 in securities available for sale.

         In addition, we have an interest in Four Oaks Statutory Trust I, a
wholly owned Delaware statutory business trust (the "Trust"), for the sole
purpose of issuing trust preferred securities. The Trust is not consolidated
with our financial statements of the Company pursuant to the provisions of
Financial Accounting Standards Board ("FASB") Interpretation No. 46,
"Consolidation of Variable Interest Entities (revised December 2003) - an
interpretation of ARB No. 51" ("FIN 46R"). We formed the Trust for the sole
purpose of issuing $12.0 million of trust preferred securities (the "Trust
Preferred Securities"). The Trust has invested the net proceeds from the sale of
the Trust Preferred Securities in Junior Subordinated Deferrable Interest
Debentures (the "Debentures") issued by us and recorded in borrowings on the
accompanying consolidated balance sheet. The Trust Preferred Securities pay
cumulative cash distributions quarterly at an annual rate, reset quarterly,
equal to three month LIBOR plus 1.35%. The dividends paid to holders of the
Trust Preferred Securities, which are recorded as interest expense, are
deductible for income tax purposes.

         As of December 31, 2008, we had assets of $924.8 million, net loans
outstanding of $672.0 million and deposits of $722.7 million. We have enjoyed
considerable growth over the past five (5) years as evidenced by a 170.6%
increase in assets, a 150.0% increase in net loans outstanding, and a 164.8%
increase in deposits since December 31, 2003. We had net income of $4.2 million
and $5.7 million and basic earnings per share of $.65 and $.92 for the years
ended December 31, 2008 and 2007, respectively. Net income of $7.0 million and
basic earnings per share of $1.15 were recorded for the year ended December 31,
2006.

         The bank continues to remain a community-focused bank engaging in
general commercial banking business to the communities we serve. The bank
provides a full range of banking services, including such services as:

               o    checking accounts;
               o    savings accounts;
               o    individual retirement accounts;


                                       - 2 -
<PAGE>

               o    NOW accounts;
               o    money market accounts;
               o    certificates of deposit;
               o    a student checking and savings program;
               o    e-statements;
               o    loans for  businesses,  agriculture,  real estate,  personal
                    uses, home improvement and automobiles;
               o    mortgage loans;
               o    equity lines of credit;
               o    credit cards;
               o    safe deposit boxes;
               o    electronic   funds   transfer   services,   including   wire
                    transfers;
               o    internet banking, bill pay services and mobile banking;
               o    telephone banking;
               o    gift cards;
               o    cashier's checks;
               o    traveler's check cards; and
               o    free notary services to all bank customers.

         The bank also provides its customers access to automated teller
machines ("ATMs") through its own ATMs throughout its communities served as well
as access to worldwide ATMs for cash withdrawals through the services of the
Star, Cirrus, or Visa networks by using ATM or Visa check cards. The Visa check
cards may also be used at merchant locations worldwide through the Star, Cirrus,
or Visa networks. Through an arrangement with Lincoln Financial Securities
Corporation acting as a registered broker-dealer performing the brokerage
services, the bank also makes available a complete line of insurance and
investment services, including financial strategies, mutual funds, annuities,
insurance, stock brokerage, IRA's, discount brokerage services, employee benefit
plans, 401(k)'s and simplified employee pension plans. The securities involved
in these services are not deposits or other obligations of the bank, and are not
insured by the Federal Deposit Insurance Corporation (the "FDIC"). At present,
the bank does not provide the services of a trust department.

         We maintain a website at www.fouroaksbank.com where our periodic
reports on Form 10-Q and 10-K and our current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act are available under "Investor Relations." We are
registered as a financial holding company with the Federal Reserve System. We
are a state-chartered member of the Federal Reserve System and the FDIC insures
the bank's deposits up to applicable limits. Our corporate offices are located
at 6114 US 301 South, Four Oaks, North Carolina, 27524. Our common stock is
traded on the OTC Bulletin Board under the symbol "FOFN".

         Our market area is concentrated in eastern and central North Carolina.
From its headquarters located in Four Oaks and its seventeen locations in Four
Oaks, Clayton, Smithfield, Garner, Benson, Fuquay-Varina, Wallace, Holly
Springs, Harrells, Sanford, Zebulon, Dunn, Rockingham and Southern Pines, the
bank serves a major portion of Johnston County, and parts of Wake, Harnett,
Duplin, Sampson, Lee, Moore and Richmond counties. Johnston County is contiguous
to Wake, Wayne, Wilson, Harnett, Sampson, and Nash counties. Wake County is
contiguous to Johnston, Durham, Harnett, Nash, Franklin, Granville and Chatham
counties. Sampson County is contiguous to Duplin, Pender, Bladen, Harnett,
Cumberland, Johnston, and Wayne counties. Lee County is contiguous to Chatham,
Moore and Harnett counties. Duplin County is contiguous to Pender, Sampson,
Wayne, Lenoir, Jones and Onslow counties. Harnett County is contiguous to
Cumberland, Moore, Lee, Chatham, Wake, Johnston and Sampson counties. Moore
County is contiguous to Harnett, Lee, Chatham, Randolph, Montgomery, Richmond,
Hoke, Cumberland and Scotland counties. Richmond County is contiguous to Anson,
Stanley, Montgomery, Moore, Hoke and Scotland counties.

           Johnston County has a diverse economy and is not dependent on any one
particular industry. The leading industries in the area include retail trade,
manufacturing, pharmaceuticals, government, services, construction, wholesale
trade and agriculture. The population for Johnston County in 2007 was estimated
in excess of 157,000. As of June 2008, the bank ranked first in deposit market
share for Johnston County at 30.2%.

         In Four Oaks, the main office is located at 6144 US 301 South and an
additional branch is located at 111 North Main Street. The bank also operates a
branch office in Clayton at 102 East Main Street, two in Smithfield at 128 North
Second Street, and 403 South Brightleaf Boulevard, two in Garner at 200 Glen
Road and 574 Village Court, one in Benson at 200 East Church Street, one in
Fuquay-Varina at 325 North Judd Parkway Northeast, one in Wallace at 406 East
Main Street, one in Holly Springs at 101 West Center Street, one in Harrells at
590 Tomahawk Highway, one in Sanford at 830 Spring Lane, one in Zebulon at 130
North Arendell Avenue, one in Dunn at 604-A Erwin Road, one in Rockingham at
1401 Fayetteville Road and one in Southern Pines at 105 Commerce Avenue.


                                       - 3 -
<PAGE>

         The majority of the bank's customers are individuals and small to
medium-size businesses. The deposits and loans are well diversified with no
material concentration in a single industry or group of related industries.
There are no seasonal factors that would have any material adverse effect on the
bank's business, and the bank does not rely on foreign sources of funds or
income.

         In an effort to offer a more diversified and competitive product line
to better serve our customers and community, in 2003 we discontinued our
provision of secondary market-type mortgages through the bank and, through a
joint venture with Centex Corporation, formed Four Oaks Mortgage Company, L.P.
From 2003 until August 2008, Four Oaks Mortgage Company, L.P. provided secondary
market-type mortgages and was the vehicle through which all of our mortgage
business was run. Four Oaks Mortgage Company, L.P. was owned 49.99% by our
wholly-owned subsidiary, Four Oaks Mortgage Services, L.L.C., and 50.01% by its
general partner, CTX Mortgage Ventures, LLC ("CTX"), a wholly-owned indirect
subsidiary of Centex Corporation. In August 2008, CTX terminated this
partnership. On September 1, 2008, we entered into a six-month marketing
agreement with PrimeLending to provide mortgage lending services.

         Amounts spent on research activities relating to the development or
improvement of services has been immaterial over the past two years. At December
31, 2008, the bank employed 208 full time equivalent employees. Our employees
are extremely important to our continued success and the bank considers its
relationship with its employees to be good. Management continually seeks ways to
improve upon their benefits and well being.

         The following table sets forth certain of our financial data and ratios
for the years ended December 31, 2008, 2007 and 2006 derived from our audited
financial statements and notes. This information should be read in conjunction
with and is qualified in its entirety by reference to the more detailed audited
financial statements and notes thereto included in this report:

<TABLE>
<CAPTION>
                                                        2008          2007          2006
                                                     ------------- ------------- ------------
                                                          (In thousands, except ratios)
                <S>                                        <C>           <C>           <C>
Net income                                           $      4,231  $      5,652  $     7,017
Average equity capital accounts                      $     66,066  $     52,246  $    45,541
Ratio of net income to average equity capital
 accounts                                                    6.40%        10.82%       15.41%
Average daily total deposits                         $    631,809  $    505,494  $   435,991
Ratio of net income to average daily total deposits          0.67%         1.12%        1.61%
Average daily loans (gross)                          $    628,507  $    494,426  $   426,768
Ratio of average daily loans to average daily total
 deposits                                                   99.48%        97.81%       97.88%
</TABLE>

MERGER WITH LONGLEAF COMMUNITY BANK

         On April 17, 2008, the Company completed the merger with LongLeaf
Community Bank ("LongLeaf"), headquartered in Rockingham, North Carolina. Under
the terms of the merger agreement, each share of LongLeaf common stock was
converted into the right to receive either (i) $16.50 in cash, without interest,
(ii) 1.0 share of the Company's common stock multiplied by an exchange ratio of
1.1542825 or (iii) 0.60 shares of the Company's common stock multiplied by an
exchange ratio of 1.1542825 plus an amount equal to $6.60 in cash. As a result
of the acquisition, the Company paid $4.9 million in cash and issued 609,770
additional shares of common stock. The acquisition was accounted for using the
purchase method of accounting, with the operating results of LongLeaf subsequent
to April 17, 2008 included in the Company's financial statements.

A summary of the total purchase price of the transaction is as follows:

<TABLE>
<CAPTION>
                                                                       (In thousands)
        <S>                                                                    <C>
Fair value of common stock issued                                      $          7,554
Fair value of common stock options issued                                           390
Cash paid for shares                                                              4,265
Transaction costs paid in cash                                                      606
                                                                       ----------------
     Total purchase price                                              $         12,815
                                                                       ================
</TABLE>


                                       - 4 -
<PAGE>

 A summary of the fair value of the assets acquired and liabilities assumed is
as follows:

<TABLE>
<CAPTION>
                                                                        (In thousands)
          <S>                                                                    <C>
Cash and due from banks                                                $           1,690
Interest-earning deposits                                                          1,763
Federal funds sold                                                                 4,585
Investment securities available for sale                                           4,212
Loans, net                                                                        47,248
Accrued interest receivable                                                          242
FHLB stock                                                                           279
Bank premises and equipment                                                        3,678
Deferred tax assets, net                                                             886
Core deposit intangible                                                              470
Goodwill                                                                           6,083
Other assets                                                                         139
Deposits                                                                         (54,514)
FHLB Advances                                                                     (2,586)
Accrued interest payable                                                            (105)
Other liabilities                                                                 (1,255)
                                                                       ------------------
     Net assets acquired                                               $          12,815
                                                                       ==================
</TABLE>

Competition

         Commercial banking in North Carolina is extremely competitive due in
large part to North Carolina's early adoption of statewide branching. As a
result, many commercial banks have branches located in several communities. The
bank competes in its market area with some of the largest banking organizations
in the state and the country and other financial institutions, such as federally
and state-chartered savings and loan institutions. At June 2008, we operated
branches in Johnston, Wake, Sampson, Duplin, Lee, Harnett, Moore and Richmond
counties, North Carolina. At that time in Johnston County, North Carolina, the
bank's primary market, there were a total of approximately $1.4 billion in
deposits and 41 branches represented by the top twelve financial institutions in
the county based on deposit share, all commercial banks. The bank operated seven
of the 41 branches with deposits of $420.7 million, placing the bank first in
the top twelve based on deposit share. Many of the bank's competitors have
broader geographic markets and higher lending limits than those of the bank and
are also able to provide more services and make greater use of media
advertising. Therefore, in our market area, the bank has significant competition
for deposits and loans from other depository institutions. Other financial
institutions such as credit unions, as well as consumer finance companies,
mortgage companies and other lenders engaged in the business of extending credit
with varying degrees of regulatory restrictions also compete in our market area.
Additionally, credit unions have been permitted to expand their membership
criteria and expand their loan services to include traditional bank services
such as commercial lending creating a greater competitive disadvantage to
tax-paying financial institutions.

         The enactment of legislation authorizing interstate banking has caused
great increases in the size and financial resources of some of the bank's
competitors. See "Holding Company Regulation" below for a description of this
legislation. In addition, as a result of interstate banking, out-of-state
commercial banks may acquire North Carolina banks and heighten the competition
among banks in North Carolina.

         Although the competition in its market areas is expected to continue to
be significant, the bank believes that it has certain competitive advantages
that distinguish it from its competition. The bank believes that its primary
competitive advantages are its strong local identity, its affiliation with the
community and its emphasis on providing specialized services to small and
medium-sized business enterprises, as well as professional and upper-income
individuals. The bank offers customers modern, high-tech banking without
forsaking community values such as prompt, personal service and friendliness.
The bank offers many personalized services and attracts and retains customers by
being responsive and sensitive to their individualized needs. The bank also
relies on goodwill and referrals from our shareholders and the bank's satisfied
customers, as well as traditional media, to attract new customers. To enhance a
positive image in the community, the bank supports and participates in local
events and its officers and directors serve on boards of local civic and
charitable organizations.

                                       - 5 -
<PAGE>

Governmental Regulation

         Holding companies, banks and many of their non-bank affiliates are
extensively regulated under both federal and state law. The following is a brief
summary of certain statutes, rules and regulations affecting us and the bank.
This summary is qualified in its entirety by reference to the particular
statutory and regulatory provisions referred to below and are not intended to be
an exhaustive description of the statutes or regulations applicable to the
business of the Company or bank. Supervision, regulation and examination of the
company and the bank by bank regulatory agencies is intended primarily for the
protection of the bank's depositors rather than the Company's shareholders.

Holding Company Regulation

         General. Four Oaks Fincorp, Inc. is a holding company registered with
the Board of Governors of the Federal Reserve System under the Bank Holding
Company Act of 1956 (the "BHCA"). As such, we are subject to the supervision,
examination and reporting requirements contained in the BHCA and the regulation
of the Federal Reserve. The bank is also subject to the BHCA. The BHCA requires
that a bank holding company obtain the prior approval of the Federal Reserve
before (i) acquiring direct or indirect ownership or control of more than five
percent of the voting shares of any bank, (ii) taking any action that causes a
bank to become a subsidiary of the bank holding company, (iii) acquiring all or
substantially all of the assets of any bank or (iv) merging or consolidating
with any other bank holding company.

         The BHCA generally prohibits a bank holding company, with certain
exceptions, from engaging in activities other than banking, or managing or
controlling banks or other permissible subsidiaries, and from acquiring or
retaining direct or indirect control of any company engaged in any activities
other than those activities determined by the Federal Reserve to be closely
related to banking, or managing or controlling banks, as to be a proper incident
thereto. In determining whether a particular activity is permissible, the
Federal Reserve must consider whether the performance of such an activity can
reasonably be expected to produce benefits to the public, such as greater
convenience, increased competition or gains in efficiency, that outweigh
possible adverse effects, such as undue concentration of resources, decreased or
unfair competition, conflicts of interest or unsound banking practices. For
example, banking, operating a thrift institution, extending credit or servicing
loans, leasing real or personal property, providing securities brokerage
services, providing certain data processing services, acting as agent or broker
in selling credit life insurance and certain other types of insurance
underwriting activities have all been determined by regulations of the Federal
Reserve to be permissible activities.

         Pursuant to delegated authority, the Federal Reserve Bank of Richmond
has authority to approve certain activities of holding companies within its
district, including us, provided the nature of the activity has been approved by
the Federal Reserve. Despite prior approval, the Federal Reserve has the power
to order a holding company or its subsidiaries to terminate any activity or to
terminate its ownership or control of any subsidiary when it believes that
continuation of such activity or such ownership or control constitutes a serious
risk to the financial safety, soundness or stability of any bank subsidiary of
that bank holding company.

         Financial Holding Companies. The Gramm-Leach-Bliley Modernization Act
of 1999 (the "GLBA"), which was enacted on November 12, 1999, allows bank
holding companies that meet certain new regulatory standards regarding
management, capital and the Community Reinvestment Act of 1997 (the "CRA"), to
engage in a broader range of non-banking activities than previously permissible,
including insurance underwriting and making merchant banking investments in
commercial and financial companies; allows insurers and other financial services
companies to acquire banks; removes various restrictions that applied to bank
holding company ownership of securities firms and mutual fund advisory
companies; and establishes the overall regulatory structure applicable to bank
holding companies that also engage in insurance and securities operations.

         Effective as of February 23, 2009, we have elected to become a
financial holding company, and therefore we are subject to the regulatory
framework under the GLBA. In addition to creating the more flexible financial
holding company structure, the GLBA introduced several additional customer
privacy protections that apply to us and the bank. The GLBA's privacy provisions
require financial institutions to, among other things: (i) establish and
annually disclose a privacy policy, (ii) give consumers the right to opt out of
disclosures to nonaffiliated third parties, with certain exceptions, (iii)
refuse to disclose consumer account information to third-party marketers and
(iv) follow regulatory standards to protect the security and confidentiality of
consumer information.

         Pursuant to the GLBA's rulemaking provisions, the Office of the
Comptroller of the Currency, the Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation and the Office of Thrift
Supervision adopted regulations, establishing standards for safeguarding
customer information. Such regulations provide financial institutions guidance
in establishing and implementing administrative, technical and physical
safeguards to protect the security, confidentiality and integrity of customer
information.

                                       - 6 -
<PAGE>

         Mergers and Acquisitions. The Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 (the "IBBEA") permits interstate acquisitions
of banks and bank holding companies without geographic limitation, subject to
any state requirement that the bank has been organized for a minimum period of
time, not to exceed five (5) years, and the requirement that the bank holding
company, prior to or following the proposed acquisition, controls no more than
ten percent (10%) of the total amount of deposits of insured depository
institutions in the U.S. and no more than thirty percent (30%) of such deposits
in any state (or such lesser or greater amount set by state law).

         In addition, the IBBEA permits a bank to merge with a bank in another
state as long as neither of the states has opted out of the IBBEA prior to May
31, 1997. In 1995, the state of North Carolina "opted in" to such legislation.
In addition, a bank may establish and operate a de novo branch in a state in
which the bank does not maintain a branch if that state expressly permits de
novo interstate branching. As a result of North Carolina having opted-in,
unrestricted interstate de novo branching is permitted in North Carolina.

         Additional Restrictions and Oversight. Subsidiary banks of a bank
holding company are subject to certain restrictions imposed by the Federal
Reserve on any extensions of credit to the bank holding company or any of its
subsidiaries, investments in the stock or securities thereof and the acceptance
of such stock or securities as collateral for loans to any borrower. A bank
holding company and its subsidiaries are also prevented from engaging in certain
tie-in arrangements in connection with any extension of credit, lease or sale of
property or furnishing of services. An example of a prohibited tie-in would be
any arrangement that would condition the provision or cost of services on a
customer obtaining additional services from the bank holding company or any of
its other subsidiaries.

         The Federal Reserve may issue cease and desist orders against bank
holding companies and non-bank subsidiaries to stop actions believed to present
a serious threat to a subsidiary bank. The Federal Reserve also regulates
certain debt obligations, changes in control of bank holding companies and
capital requirements.

         Under the provisions of the North Carolina law, we are registered with
and subject to supervision by the North Carolina Commissioner of Banks.

         Capital Requirements. The Federal Reserve has established risk-based
capital guidelines for bank holding companies and state member banks. The
minimum standard for the ratio of capital to risk-weighted assets (including
certain off balance sheet obligations, such as standby letters of credit) is
eight percent (8%). At least half of this capital must consist of common equity,
retained earnings and a limited amount of perpetual preferred stock and minority
interests in the equity accounts of consolidated subsidiaries, less goodwill
items and certain other items ("Tier 1 capital"). The remainder ("Tier 2
capital") may consist of mandatory convertible debt securities and a limited
amount of other preferred stock, subordinated debt and loan loss reserves.

         In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
leverage ratio of Tier 1 capital to adjusted average quarterly assets less
certain amounts ("Leverage Ratio") equal to three percent for bank holding
companies that meet certain specified criteria, including having the highest
regulatory rating. All other bank holding companies will generally be required
to maintain a Leverage Ratio of between four percent and five percent.

         The guidelines also provide that bank holding companies experiencing
significant growth, whether through internal expansion or acquisitions, will be
expected to maintain strong capital ratios well above the minimum supervisory
levels without significant reliance on intangible assets. The same heightened
requirements apply to bank holding companies with supervisory, financial,
operational or managerial weaknesses, as well as to other banking institutions
if warranted by particular circumstances or the institution's risk profile.
Furthermore, the guidelines indicate that the Federal Reserve will continue to
consider a "tangible Tier 1 Leverage Ratio" (deducting all intangibles) in
evaluating proposals for expansion or new activity. The Federal Reserve has not
advised us of any specific minimum Leverage Ratio or tangible Tier 1 Leverage
Ratio applicable to us.

         As of December 31, 2008, we had Tier 1 risk-adjusted, total regulatory
capital and leverage capital of approximately 10.12%, 11.46% and 7.99%,
respectively, all in excess of the minimum requirements to be considered
well-capitalized under prompt corrective action provisions.

         Dividends. During 2008, we paid cash dividends of $.325 per share on
 our common stock, a 12.1% increase over 2007. North Carolina banking law
 requires that dividends be paid out of retained earnings as determined pursuant
 to North Carolina General Statues Section 53-87. At present, the Company has
 sufficient cash from its operations to pay cash dividends on its common stock.
 In the past, we have received cash dividends from our bank and may continue to
 do so from time to time in the future as necessary for cash flow purposes.
 Also, applicable federal banking law contains additional limitations and
 restrictions on the payment of dividends by a bank holding company.
 Accordingly, shareholders receive dividends from us only to the extent that
 funds are available from our operations or the bank. In addition, the Federal
 Reserve generally prohibits bank holding companies from paying dividends except
 out of operating earnings, and the prospective rate of earnings retention
 appears consistent with the bank holding company's capital needs, asset quality
 and overall financial condition.

                                       - 7 -
<PAGE>

         USA Patriot Act of 2001. Title III of the USA Patriot Act of 2001
contains the International Money Laundering Abatement and Financial
Anti-Terrorism Act of 2001 (the "IMLAFA"). The anti-money laundering provisions
of IMLAFA impose affirmative obligations on a broad range of financial
institutions, including banks, brokers, and dealers. Among other requirements,
IMLAFA requires all financial institutions to establish anti-money laundering
programs that include, at minimum, internal policies, procedures, and controls;
specific designation of an anti-money laundering compliance officer; ongoing
employee training programs; and an independent audit function to test the
anti-money laundering program. IMLAFA requires financial institutions that
establish, maintain, administer, or manage private banking accounts for
non-United States persons or their representatives to establish appropriate,
specific, and, where necessary, enhanced due diligence policies, procedures, and
controls designed to detect and report money laundering. Additionally, IMLAFA
provides for the Department of Treasury to issue minimum standards with respect
to customer identification at the time new accounts are opened. As of the date
of this filing, we believe that IMLAFA has not had a material impact on the
bank's operations. The bank has established policies and procedures to ensure
compliance with the IMLAFA, which are overseen by an Anti-Money Laundering
Officer who was appointed by our Board of Directors.

Bank Regulation

         The bank is subject to numerous state and federal statutes and
regulations that affect its business, activities, and operations, and is
supervised and examined by the North Carolina Commissioner of Banks and the
Federal Reserve. The Federal Reserve and the North Carolina Commissioner of
Banks regularly examine the operations of banks over which they exercise
jurisdiction. They have the authority to approve or disapprove the establishment
of branches, mergers, consolidations, and other similar corporate actions, and
to prevent the continuance or development of unsafe or unsound banking practices
and other violations of law. The Federal Reserve and the North Carolina
Commissioner of Banks regulate and monitor all areas of the operations of banks
and their subsidiaries, including loans, mortgages, issuances of securities,
capital adequacy, loss reserves, and compliance with the CRA, as well as other
laws and regulations. Interest and certain other charges collected and
contracted for by banks are also subject to state usury laws and certain federal
laws concerning interest rates.

         The deposit accounts of the bank are insured by the Deposit Insurance
Fund (the "DIF") of the Federal Deposit Insurance Corporation (the "FDIC") up to
a maximum of two hundred fifty thousand dollars ($250,000) per insured
depositor, with the exception of non-interest bearing accounts and NOW accounts
paying .5% or less, which are 100% FDIC insured. These increased insurance
limits are in effect through December 31, 2009. Any insured bank that is not
operated in accordance with or does not conform to FDIC regulations, policies,
and directives may be sanctioned for noncompliance. Civil and criminal
proceedings may be instituted against any insured bank or any director, officer
or employee of such bank for the violation of applicable laws and regulations,
breaches of fiduciary duties or engaging in any unsafe or unsound practice. The
FDIC has the authority to terminate insurance of accounts pursuant to procedures
established for that purpose.

         Under the North Carolina Business Corporation Act, we may not pay a
dividend or distribution, if after giving it effect we would not be able to pay
our debts as they become due in the usual course of business or our total assets
would be less than our liabilities. All dividends paid by the bank are paid to
us, the sole shareholder of the bank. In general, our ability to pay cash
dividends is dependent in part upon the amount of dividends paid to us by the
bank. The ability of the bank to pay dividends to us is subject to statutory and
regulatory restrictions on the payment of cash dividends, including the
requirement under the North Carolina banking laws that cash dividends be paid
only out of undivided profits and only if the bank has surplus of a specified
level. The Federal Reserve also imposes limits on the bank's payment of
dividends. The amount of future dividends paid to us by the bank will in general
be a function of the profitability of the bank, which cannot be accurately
estimated or assured. We expect the bank will continue to pay us dividends in
the foreseeable future from time to time as needed to pay cash dividends to our
shareholders.

         Like us, the bank is required by federal regulations to maintain
certain minimum capital levels. The levels required of the bank are the same as
those required of us. At December 31, 2008, the bank had Tier 1 risk-adjusted,
total regulatory capital and leverage capital of approximately 9.44%, 10.69% and
7.43%, respectively, in excess of the minimum requirements to be considered
well-capitalized under prompt corrective action provisions.

                                       - 8 -
<PAGE>

         The bank is subject to insurance assessments imposed by the FDIC,
including a risk-based assessment schedule providing for annual assessment rates
ranging from 5 to 43 cents per $100 in assessable deposits, applicable to
institutions insured by the DIF. The FDIC may change the assessment schedule
quarterly. The actual assessment to be paid by each insured institution is based
on the institution's assessment risk classification, which focuses on whether
the institution is considered "well capitalized," "adequately capitalized" or
"under capitalized," as such terms are defined in the applicable federal
regulations. Within each of these three risk classifications, each institution
will be assigned to one of three subgroups based on supervisory risk factors. In
particular, regulators will assess supervisory risk based on whether the
institution is financially sound with only a few minor weaknesses (Subgroup A),
whether it has weaknesses which, if not corrected, could result in an increased
risk of loss to the DIF (Subgroup B) or whether such weaknesses pose a
substantial probability of loss to the DIF unless effective corrective action is
taken (Subgroup C). The FDIC also is authorized to impose one or more special
assessments in an amount deemed necessary to enable repayment of amounts
borrowed by the FDIC from the United States Treasury Department and, beginning
in 1997, all banks are required to pay additional annual assessments as set by
the Financing Corporation, which was established by the Competitive Equality
Banking Act of 1987.

         The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") provides for, among other things, (i) publicly available annual
financial condition and management reports for certain financial institutions,
including audits by independent accountants, (ii) the establishment of uniform
accounting standards by federal banking agencies, (iii) the establishment of a
"prompt corrective action" system of regulatory supervision and intervention,
based on capitalization levels, with greater scrutiny and restrictions placed on
depository institutions with lower levels of capital, (iv) additional grounds
for the appointment of a conservator or receiver and (v) restrictions or
prohibitions on accepting brokered deposits, except for institutions which
significantly exceed minimum capital requirements. FDICIA also provides for
increased funding of the FDIC insurance funds and the implementation of
risk-based premiums.

         A central feature of FDICIA is the requirement that the federal banking
agencies take "prompt corrective action" with respect to depository institutions
that do not meet minimum capital requirements. Pursuant to FDICIA, the federal
bank regulatory authorities have adopted regulations setting forth a five-tiered
system for measuring the capital adequacy of the depository institutions that
they supervise. Under these regulations, a depository institution is classified
in one of the following capital categories: "well capitalized," "adequately
capitalized," "under capitalized," "significantly undercapitalized," or
"critically undercapitalized." An institution may be deemed by the regulators to
be in a capitalization category that is lower than is indicated by its actual
capital position if, among other things, it receives an unsatisfactory
examination rating with respect to asset quality, management, earnings or
liquidity. FDICIA provides the federal banking agencies with significantly
expanded powers to take enforcement action against institutions which fail to
comply with capital or other standards. Such action may include the termination
of deposit insurance by the FDIC or the appointment of a receiver or conservator
for the institution.

         Banks are also subject to the CRA, which requires the appropriate
federal bank regulatory agency, in connection with its examination of a bank, to
assess such bank's record in meeting the credit needs of the community served by
that bank, including low and moderate-income neighborhoods. Each institution is
assigned one of the following four ratings of its record in meeting community
credit needs: "outstanding," "satisfactory," "needs to improve" or "substantial
noncompliance." The regulatory agency's assessment of the bank's record is made
available to the public. Further, such assessment is required of any bank which
has applied to (i) charter a national bank, (ii) obtain deposit insurance
coverage for a newly chartered institution, (iii) establish a new branch office
that will accept deposits, (iv) relocate an office or (v) merge or consolidate
with, or acquire the assets or assume the liabilities of, a federally regulated
financial institution. In the case of a bank holding company applying for
approval to acquire a bank or other bank holding company, the Federal Reserve
will assess the record of each subsidiary bank of the applicant bank holding
company, and such records may be the basis for denying the application.

         In addition, the GLBA's "CRA Sunshine Requirements" call for financial
institutions to disclose publicly certain written agreements made in fulfillment
of the CRA. Banks that are parties to such agreements also must report to
federal regulators the amount and use of any funds expended under such
agreements on an annual basis, along with such other information as regulators
may require. This annual reporting requirement is effective for any agreements
made after May 12, 2000.

                                       - 9 -
<PAGE>

Monetary Policy and Economic Controls

         Both the Company and the bank are directly affected by governmental
policies and regulatory measures affecting the banking industry in general. Of
primary importance is the Federal Reserve Board, whose actions directly affect
the money supply which, in turn, affects banks' lending abilities by increasing
or decreasing the cost and availability of funds to banks. The Federal Reserve
Board regulates the availability of bank credit in order to combat recession and
curb inflationary pressures in the economy by open market operations in United
States government securities, changes in the discount rate on member bank
borrowings, changes in reserve requirements against bank deposits, and
limitations on interest rates that banks may pay on time and savings deposits.

         Deregulation of interest rates paid by banks on deposits and the types
of deposits that may be offered by banks have eliminated minimum balance
requirements and rate ceilings on various types of time deposit accounts. The
effect of these specific actions and, in general, the deregulation of deposit
interest rates has generally increased banks' cost of funds and made them more
sensitive to fluctuations in money market rates. In view of the changing
conditions in the national economy and money markets, as well as the effect of
actions by monetary and fiscal authorities, no prediction can be made as to
possible future changes in interest rates, deposit levels, or loan demand on our
business and earnings or those of the bank. As a result, banks, including the
bank, face a significant challenge to maintain acceptable net interest margins.




                (the rest of this page left intentionally blank)

                                       - 10 -
<PAGE>

Executive Officers of the Registrant

         The following table sets forth certain information with respect to our
executive officers:


<TABLE>
<CAPTION>

                                                      Positions and offices with Four Oaks Fincorp, Inc.
                                   Year first               and Four Oaks Bank & Trust Company and
Name                   Age         employed             business experience during past five (5) years
--------------------------------------------------------------------------------------------------------
     <S>                  <C>          <C>                                  <C>
Ayden R. Lee, Jr.          60           1980          Chief Executive Officer, President and
                                                      Chairman of the Board of Directors of
                                                      Four Oaks Fincorp, Inc. and Four Oaks
                                                      Bank & Trust Company. Previously Director
                                                      of Four Oaks Fincorp, Inc. and Four Oaks
                                                      Bank & Trust Company.

Clifton L. Painter         59           1986          Senior Executive Vice President, Chief
                                                      Operating Officer of Four Oaks Fincorp,
                                                      Inc. and Four Oaks Bank & Trust Company.

Nancy S. Wise              53           1991          Executive Vice President, Chief Financial
                                                      Officer of Four Oaks Fincorp, Inc. and
                                                      Four Oaks Bank & Trust Company.
                                                      Previously, Senior Vice President, Chief
                                                      Financial Officer of Four Oaks Fincorp,
                                                      Inc. and Four Oaks Bank & Trust Company.

W. Leon Hiatt, III         41           1994          Executive Vice President of Four Oaks
                                                      Fincorp, Inc. and Four Oaks Bank & Trust
                                                      Company, Chief Administrative Officer of
                                                      Four Oaks Bank & Trust Company.
                                                      Previously, Senior Vice President Four
                                                      Oaks Fincorp, Inc. and Four Oaks Bank &
                                                      Trust Company, Loan Administrator of Four
                                                      Oaks Bank & Trust Company.

Jeff D. Pope               52           1991          Executive Vice President of Four Oaks
                                                      Fincorp, Inc. and Four Oaks Bank & Trust
                                                      Company, Chief Banking Officer of Four
                                                      Oaks Bank & Trust Company. Previously,
                                                      Branch Administrator, Senior Vice
                                                      President, Loan Officer and Regional
                                                      Branch Administrator of Four Oaks Bank
                                                      and Trust Company.
</TABLE>


                                       - 11 -
<PAGE>

Item 1A.  Risk Factors

Our Results Are Impacted by the Economic  Conditions of Our Principal  Operating
Regions

         The majority of our customers are individuals and small to medium-size
businesses located in North Carolina's Johnston, Wake, Duplin, Sampson, Harnett,
Lee, Moore and Richmond counties and surrounding areas. As a result of this
geographic concentration, our results may correlate to the economic conditions
in these areas. Declines in these markets' economic conditions may adversely
affect the quality of our loan portfolio and the demand for our products and
services, and accordingly, our results of operations.

We Are Exposed to Risks in Connection with the Loans We Make

         A significant source of risk for us arises from the possibility that
loan losses will be sustained because borrowers, guarantors, and related parties
fail to perform in accordance with the terms of their loans. Our policy dictates
that we maintain an allowance for loan losses. The amount of the allowance is
based on management's evaluation of our loan portfolio, the financial condition
of the borrowers, current economic conditions, past and expected loan loss
experience, and other factors management deems appropriate. Such policies and
procedures, however, may not prevent unexpected losses that could adversely
affect our results of operations.

         If the value of real estate in our core market areas were to decline
materially, a significant portion of our loan portfolio could become
undercollateralized, which could have a material adverse effect on us. With most
of our loans concentrated in the Coastal Plain region of North Carolina, a
decline in local economic conditions could adversely affect the values of our
real estate collateral. Consequently, a decline in local economic conditions may
have a greater effect on our earnings and capital than on the earnings and
capital of larger financial institutions whose real estate loan portfolios are
geographically diverse. In addition to the financial strength and cash flow
characteristics of the borrower in each case, the Bank often secures loans with
real estate collateral. At December 31, 2008, approximately 88% of the Bank's
loans had real estate as a primary or secondary component of collateral. The
real estate collateral in each case provides an alternate source of repayment in
the event of default by the borrower and may deteriorate in value during the
time the credit is extended. If we are required to liquidate the collateral
securing a loan to satisfy the debt during a period of reduced real estate
values, our earnings and capital could be adversely affected.

We Compete with Larger Companies for Business

         Commercial banking in North Carolina is extremely competitive due in
large part to North Carolina's early adoption of statewide branching. The bank
competes in the North Carolina market area with some of the largest banking
organizations in the state and the country and other financial institutions,
such as federally and state-chartered savings and loan institutions and credit
unions, as well as consumer finance companies, mortgage companies and other
lenders engaged in the business of extending credit. Many of these competitors
have broader geographic markets, higher lending limits, more services, and more
media advertising. We may not be able to compete effectively in our markets, and
our results of operations could be adversely affected by the nature or pace of
change in competition.

We Are Exposed to Certain Market Risks

         Like most financial institutions, our most significant market risk
exposure is the risk of economic loss resulting from adverse changes in market
prices and interest rates. Our market risk stems primarily from interest rate
risk inherent in our lending and deposit-taking activities. Our policy allows
that we may maintain derivative financial instruments, such as interest rate
swap agreements, to manage such risk.

         To manage the risk of potentially decreasing interest rates for our
variable rate loan portfolio, from time to time we may use an interest rate swap
agreement whereby we contract to receive fixed rate payments and in turn, we
agree to make variable interest payments for a defined time period. In addition,
we use fixed rate time deposits, such as certificates of deposit, for use in our
lending and investment activities. If the interest rates decline, we face the
risk of being committed to pay a fixed rate that is higher than the fair value
rate of such deposits. To manage this risk, we may use interest rate swaps
whereby we contract to make a series of floating rate payments in exchange for
receiving a series of fixed rate payments.

         Because the value of derivative contracts is tied to an independent
instrument, index or reference rate, the contracts are written in abstract
amounts that only provide the basis for calculating payments between
counterparties, i.e., notional amounts. Credit risk arises when amounts
receivable from the counterparty exceed amounts payable, or when the
counterparty fails to pay. The counterparties to these contracts are primarily
large commercial banks and investment banks. We control our risk of loss on
derivative contracts by subjecting each contracting counterparty to credit
reviews and approvals similar to those used in making loans and other extensions
of credit, and we continuously monitor these agreements. Other risks include the
effect on fixed rate positions during periods of changing interest rates, e.g.,
when interest rates fall, the notional amounts decrease more rapidly, whereas
when interest rates rise, the notional amounts decrease more slowly.

                                       - 12 -
<PAGE>

U.S. and International Credit Markets and Economic Conditions Could Affect the
Company's Liquidity and Financial Condition

         As described in Part I, Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Impact of Recent Developments
on the Banking Industry," global market and economic conditions continue to be
disruptive and volatile and the disruption has particularly had a negative
impact on the financial sector. The possible duration and severity of this
adverse economic cycle is unknown. Although the Company remains well-capitalized
and has not suffered any liquidity issues as a result of these recent events,
the cost and availability of funds may be adversely affected by illiquid credit
markets. Continued turbulence in U.S. and international markets and economies
may adversely affect the Company's liquidity, financial condition, and
profitability.

         While the U.S. and foreign governments have instituted programs to
address economic stabilization, the efficacy of these programs in stabilizing
the economy and the banking system at large are uncertain. Details as to the
Company's ultimate participation in the U.S. Treasury's Capital Purchase Program
and its subsequent impact on the Company also remain uncertain. Although the
final terms of the program have not been decided, the U.S. Treasury's program
could reduce investment returns to participating banks' shareholders by
restricting dividends to common shareholders, diluting existing shareholders
interests and restricting capital management practices.

         In addition, federal and state governments could pass additional
legislation responsive to current credit conditions. The Company could
experience higher credit losses because of legislation or regulatory action that
reduces the amounts borrowers are contractually required to pay under existing
loan contracts or that limits its ability to foreclose on property or other
collateral or makes foreclosure less economically feasible.

Technological Advances

         The banking industry undergoes frequent technological changes with
introductions of new technology-driven products and services. In addition to
improving customer services, the effective use of technology increases
efficiency and enables financial institutions to reduce costs. Our future
success will depend, in part, on our ability to address the needs of our
customers by using technology to provide products and services that will satisfy
customer demands for convenience as well as to create additional efficiencies in
our operations. Many of our competitors, however, have substantially greater
resources to invest in technological improvements.

Compliance  with  Changing  Laws,   Regulations  and  Standards  May  Result  in
Additional Risks and Expenses

         We are subject to changing laws, regulations and standards, including
the BHCA, the GLBA, the IBBEA, the USA Patriot Act of 2001, the FDIC, the CRA,
the North Carolina Business Corporation Act, the Sarbanes-Oxley Act of 2002
("Sarbanes-Oxley"), and new SEC regulations to name a few.

         Sarbanes-Oxley and new SEC regulations, in particular, are creating
uncertainty for companies such as ours because they are subject to varying
interpretations in many cases. As a result, their application in practice may
evolve over time as new guidance is provided by regulatory and governing bodies,
which could result in continuing uncertainty regarding compliance matters and
higher costs necessitated by ongoing revisions to disclosure and governance
practices. We are committed to maintaining high standards of corporate
governance and public disclosure. As a result, our efforts to comply with
evolving laws, regulations, and standards have resulted in, and are likely to
continue to result in, increased expenses and a diversion of management time and
attention. Specifically, our efforts to comply with Section 404 of
Sarbanes-Oxley and the related regulations regarding management's required
assessment of our internal control over financial reporting and our external
auditors' audit of that assessment have required the commitment of significant
financial and managerial resources. We expect these efforts to require the
continued commitment of significant resources. Further, the members of our board
of directors, members of the audit or compensation committees, our chief
executive officer, our chief financial officer, and certain other of our
executive officers could face an increased risk of personal liability in
connection with the performance of their duties. In addition, it may become more
difficult and more expensive to obtain director and officer liability insurance.
As a result, our ability to attract and retain executive officers and qualified
board and committee members could be more difficult.

                                       - 13 -
<PAGE>

Government  Regulations  May  Prevent  or Impair Our  Ability to Pay  Dividends,
Engage in Acquisitions or Operate in Other Ways

         Current and future legislation and the policies established by federal
and state regulatory authorities will affect our operations. We are subject to
supervision and a periodic examination by the Federal Reserve Bank and the North
Carolina State Banking Commission. Banking regulations, designed primarily for
the protection of depositors, may limit our growth and the return to you, our
investors, by restricting certain of our activities, such as:

               o    payment of dividends to our shareholders;
               o    possible  mergers  with  or  acquisitions  of  or  by  other
                    institutions;
               o    our desired investments;
               o    loans and interest rates on loans;
               o    payment  of  interest,  interest  rates on  deposits;
               o    the possible expansion of branch offices; and/or
               o    our ability to make other financial services available.

         We also are subject to capitalization guidelines set forth in federal
regulations, and could be subject to enforcement actions to the extent that we
are found by regulatory examiners to be undercapitalized. We cannot predict what
changes, if any, will be made to existing federal and state legislation and
regulations or the effect that such changes may have on our future business and
earnings prospects. The cost of compliance with regulatory requirements
including those imposed by the SEC may adversely affect our ability to operate
profitably.

We Depend Heavily on our Key Management Personnel

         Our success depends in part on our ability to retain key executives and
to attract and retain additional qualified management personnel who have
experience both in sophisticated banking matters and in operating a small to
mid-size bank. Competition for such personnel is strong in the banking industry
and we may not be successful in attracting or retaining the personnel we
require. We expect to compete effectively in this area by offering competitive
financial packages that include incentive-based compensation.

We Have a High Concentration of Loans Secured by Real Estate

         A significant portion of our loan portfolio is dependent on real
estate. In addition to the financial strength and cash flow characteristics of
the borrower in each case, often loans are secured with real estate collateral.
At December 31, 2008, approximately 88.2% of our loans have real estate as a
primary or secondary component of collateral. The real estate in each case
provides an alternate source of repayment in the event of default by the
borrower and may deteriorate in value during the time the credit is extended. An
adverse change in the economy affecting values of real estate generally or in
our primary markets specifically could significantly impair the value of
collateral and our ability to sell the collateral upon foreclosure. Furthermore,
it is likely that, in a decreasing real estate market, we would be required to
increase our allowance for loan losses. If we are required to liquidate the
collateral securing a loan to satisfy the debt during a period of reduced real
estate values or to increase our allowance for loan losses, our profitability
and financial condition could be adversely impacted.

Our Allowance for Probable Loan Losses May Be Insufficient

         We maintain an allowance for probable loan losses, which is a reserve
established through a provision for probable loan losses charged to expense.
This allowance represents management's best estimate of probable losses that
have been incurred within the existing portfolio of loans. The allowance, in the
judgment of management, is necessary to reserve for estimated loan losses and
risks inherent in the loan portfolio. The level of the allowance reflects
management's continuing evaluation of industry concentrations; specific credit
risks; loan loss experience; current loan portfolio quality; present economic,
political, and regulatory conditions and unidentified losses inherent in the
current loan portfolio. The determination of the appropriate level of the
allowance for probable loan losses inherently involves a high degree of
subjectivity and requires us to make significant estimates and assumptions
regarding current credit risks and future trends, all of which may undergo
material changes. Changes in economic conditions affecting borrowers, new
information regarding existing loans, identification of additional problem loans
and other factors, both within and outside our control, may require an increase
in the allowance for probable loan losses. In addition, bank regulatory agencies
periodically review our allowance for loan losses and may require an increase in
the provision for probable loan losses or the recognition of further loan
charge-offs, based on judgments different than those of management. In addition,
if charge-offs in future periods exceed the allowance for probable loan losses;
we will need additional provisions to increase the allowance for probable loan
losses. Any increases in the allowance for probable loan losses will result in a
decrease in net income and, possibly, capital, and may have a material adverse
effect on our financial condition and results of operations. See Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operations for further discussion related to our process for determining the
appropriate level of the allowance for probable loan losses.

                                       - 14 -
<PAGE>

We May Experience Goodwill Impairment

In light of the overall instability of the economy, the continued volatility in
the financial markets, the downward pressure on bank stock prices, and
expectations of financial performance for the banking industry, including the
Company, our estimates of goodwill fair value may be subject to change or
adjustment and we may determine that additional impairment charges are
necessary. No assurance can be given that goodwill will not be written down in
future periods.

We  Are  Subject  To  Environmental   Liability  Risk  Associated  With  Lending
Activities

         A significant portion of our loan portfolio is secured by real
property. During the ordinary course of business, we may foreclose on and take
title to properties securing certain loans. In doing so, there is a risk that
hazardous or toxic substances could be found on these properties. If hazardous
or toxic substances are found, we may be liable for remediation costs, as well
as for personal injury and property damage. Environmental laws may require us to
incur substantial expenses and may materially reduce the affected property's
value or limit our ability to use or sell the affected property. In addition,
future laws or more stringent interpretations or enforcement policies with
respect to existing laws may increase our exposure to environmental liability.
Although we have policies and procedures to perform an environmental review
before initiating any foreclosure action on nonresidential real property, these
reviews may not be sufficient to detect all potential environmental hazards. The
remediation costs and any other financial liabilities associated with an
environmental hazard could have a material adverse effect on our financial
condition and results of operations.

Our Controls and Procedures May Fail or Be Circumvented

         Management regularly reviews and updates our internal controls,
disclosure controls and procedures, and corporate governance policies and
procedures. Any system of controls, however well designed and operated, is based
in part on certain assumptions and can provide only reasonable, not absolute,
assurances that the objectives of the system are met. Any failure or
circumvention of our controls and procedures or failure to comply with
regulations related to controls and procedures could have a material adverse
effect on our business, results of operations and financial condition.

The Holders of Our Subordinated  Debentures Have Rights That Are Senior to Those
of Our Shareholders

         As described below, we have issued $12.0 million of subordinated
debentures in connection with a trust preferred securities issuance by our
subsidiary, the Trust. We unconditionally guarantee payments of the principal
and interest on the trust preferred securities. Our subordinated debentures are
senior to our shares of common stock. As a result, we must make payments on the
subordinated debentures (and the related trust preferred securities) before any
dividends can be paid on our common stock and, in the event of bankruptcy,
dissolution or liquidation, the holders of the debentures must be satisfied
before any distributions can be made to the holders of common stock.

Our Information Systems May Experience an Interruption or Breach in Security

         We rely heavily on communications and information systems to conduct
our business. Any failure, interruption, or breach in security of these systems
could result in failures or disruptions in our customer relationship management,
general ledger, deposit, loan, and other systems. While we have policies and
procedures designed to prevent or limit the effect of the failure, interruption
or security breach of our information systems, there can be no assurance that we
can prevent any such failures, interruptions or security breaches or, if they do
occur, that they will be adequately addressed. The occurrence of any failures,
interruptions, or security breaches of our information systems could damage our
reputation, result in a loss of customer business, subject us to additional
regulatory scrutiny, or expose us to civil litigation and possible financial
liability, any of which could have a material adverse effect on our financial
condition and results of operations.

                                       - 15 -
<PAGE>

An Investment in Our Common Stock Is Not an Insured Deposit

         Our common stock is not a bank deposit and, therefore, is not insured
against loss by the FDIC, any other deposit insurance fund or by any other
public or private entity. Investment in our common stock is inherently risky for
the reasons described in this "Risk Factors" section and elsewhere in this
report and is subject to the same market forces that affect the price of common
stock in any company. As a result, if you acquire our common stock, you may lose
some or all of your investment.

Consumers May Decide Not To Use Banks to Complete Their Financial Transactions

         Technology and other changes are allowing parties to complete financial
transactions that historically have involved banks through alternative methods.
For example, consumers can now maintain funds that historically would have been
held as bank deposits in brokerage accounts or mutual funds. Consumers can also
complete transactions such as paying bills and/or transferring funds directly
without the assistance of banks. The process of eliminating banks as
intermediaries could result in the loss of fee income, as well as the loss of
customer deposits and the related income generated from those deposits. The loss
of these revenue streams and the lower cost deposits as a source of funds could
have a material adverse effect on our financial condition and results of
operations.

Item 1B - Unresolved Staff Comments.

         Not applicable.

Item 2 - Properties.

         The bank owns its main office, which is located at 6144 US 301 South,
 Four Oaks, North Carolina. The main office, which was constructed by the bank
 in 1985, is a 12,000 square foot facility on 1.64 acres of land. The bank
 leases a limited-service facility in downtown Four Oaks located at 111 North
 Main Street from M.S. Canaday, who is a former director of the company as well
 as a former director of the bank. Under the terms of the lease, which the bank
 believes to be arms-length, the bank paid $1,036 per month in rent in 2008. The
 lease is month-to-month and we review its terms on an annual basis. The bank
 also leases a branch office located at 101 West Center Street, Holly Springs,
 North Carolina. Under the terms of the lease, the bank will pay $2,575 per
 month for a period of five years ending April 1, 2009, with a 3% increase per
 year for the next 5 years until March 31, 2013.

         The bank's Harrells office located at 590 Tomahawk Highway, Harrells,
 North Carolina is under a lease with terms specifying the bank will pay $600
 each month for a period of four years ending December 31, 2009. In addition,
 the bank has entered into a ten-year lease on its Sanford office located at 830
 Spring Lane Sanford, North Carolina. Under the terms of the lease, the bank
 will pay $7,600 each month with an annual rate increase not to exceed 2.5% over
 a 10 year period. On September 17, 2007, the bank entered into a two year lease
 on its Dunn office located at 604-A Erwin Road, Dunn, North Carolina. Under the
 terms of the lease, the bank will pay $1,500 each month for the period
 beginning September 17, 2007 and ending August 31, 2009. In addition, the bank
 has leased additional space for its Dunn location for a one year term beginning
 September 8, 2008 at $400 per month. On February 25, 2008, the bank entered
 into a five year lease on its Garner Village office, located at 504-574 Village
 Court, Garner, North Carolina. Under the terms of the lease, the bank will pay
 $3,000 each month with an annual rate increase not to exceed 3% over a 5 year
 period. The bank owns a 5,000 square foot facility renovated in 1992 on 1.15
 acres of land located at 5987 US 301 South, Four Oaks, North Carolina which
 houses its training center. The bank also owns a 15,000 square foot facility
 built in 2000 located at 6114 US 301 South, Four Oaks, North Carolina, which
 houses its administrative offices, data operations, loan operations, and wide
 area network central link. In addition, the bank owns the following:

                                       - 16 -
<PAGE>

Location                        Year Built      Present Function   Square Feet
--------                        ----------      ----------------   -----------

102 East Main Street
Clayton, North Carolina                1986     Branch Office            4,900

200 East Church Street
Benson, North Carolina                 1987     Branch Office            2,300

128 North Second Street
Smithfield, North Carolina             1991     Branch Office            5,500

403 South Brightleaf Boulevard                  Limited-Service
Smithfield, North Carolina             1995     Facility                   860

200 Glen Road
Garner, North Carolina                 1996     Branch Office            3,500

325 North Judd Parkway Northeast
Fuquay-Varina, North Carolina          2002     Branch Office            8,900

406 East Main Street
Wallace, North Carolina                2006     Branch Office            9,300

805 N. Arendell Avenue
Zebulon, North Carolina                2007     Branch Office            6,100

1401 Fayetteville Road
Rockingham, North Carolina             2005     Branch Office           10,200

105 Commerce Avenue
Southern Pines, North Carolina         2005     Branch Office            4,100

         On September 1, 2008, the bank leased three offices of its
Fuquay-Varina branch office to PrimeLending under a six-month lease. Under the
terms of the lease, the bank receives $1,000 per month in rent from
PrimeLending.

         Management believes each of the properties referenced above is
adequately covered by insurance. In addition to the above locations, we have one
ATM located inside Blackmon's Country store in Four Oaks and 15 ATMs in Food
Lion grocery stores in the cities and towns of Clayton, Benson, Sanford,
Wallace, Fuquay-Varina, Holly Springs, Garner, Zebulon, and Wendell, North
Carolina. The net book value for our properties, including land, buildings, and
furniture and equipment was $17.2 million at December 31, 2008. Additional
information is disclosed in Note D "Bank Premises and Equipment" to our
consolidated financial statements presented under Item 8 of Part II of this Form
10-K.

Item 3 - Legal Proceedings.

We are not involved in any material legal proceedings at the present time.

                                       - 17 -
<PAGE>

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

         A Special Meeting of Shareholders was held on Monday, December 22,
2008. The following matters were submitted to a vote of the shareholders with
the results shown below:

(a)  Approval of amendment to the Articles of Incorporation to authorize 50,000
     shares of preferred stock, no par value per share, which may be issued by
     the Company in the future with such rights, preferences and designations as
     determined by our board of directors without further shareholder action

       Votes For                 Votes Against                  Abstained
-----------------------     -------------------------    -----------------------
       4,171,852                    411,411                       14,189

(b) Approval of proposal to adjourn, postpone or continue the Special Meeting in
order to enable our board of directors to continue to solicit additional proxies
in favor of the proposal to amend our articles of incorporation

       Votes For                 Votes Against                  Abstained
-----------------------     -------------------------    -----------------------
       4,147,470                    330,948                       119,494

         The matters listed above are described in detail in our definitive
proxy statement dated December 4, 2008 for the Special Meeting of Shareholders
held on December 22, 2008.



                   (the rest of this page intentionally blank)

                                       - 18 -
<PAGE>

                                     PART II

Item 5 - Market for Registrant's Common Equity,  Related Stockholder Matters and
Issuer Purchases of Equity Securities.

         Our common stock trades on the OTC Bulletin Board under the symbol
"FOFN." The range of high and low bid prices of our common stock for each
quarter during the two most recent fiscal years, as published by the OTC
Bulletin Board, adjusted for stock splits, is as follows (prices reflect
inter-dealer prices, without retail mark-up, mark-down or commissions and may
not necessarily represent actual transactions):

                                         Fiscal Year Ended December 31,
                                         ------------------------------
                                         2007                    2008
                                  -------------------   ----------------------
                                    High       Low          High        Low
                                  --------- ---------   ------------ ---------
First quarter                     $   24.77 $   23.64   $      17.00 $   14.75
Second quarter                        23.64     20.00          16.25     11.00
Third quarter                         20.00     18.82          14.50     10.50
Fourth quarter                        19.09     15.50          11.00      6.50

         As of March 5, 2009, the approximate number of holders of record of our
common stock was 2,100. We have no other class of equity securities. The bank's
ability to declare a dividend to us and the company's ability to pay dividends
are subject to the restrictions of the North Carolina Business Corporation Act.
There also are state banking laws that require a surplus of at least 50% of
paid-in capital stock be maintained in order for the bank to declare a dividend
to the company. Subject to the legal availability of funds to pay dividends,
cash dividends paid by us in 2008 and 2007, after giving effect to the 10% stock
dividend in 2007 were $0.325 and $0.29 per share, respectively.

         We did not sell any securities in 2008 that were not registered under
the Securities Act of 1933 as amended. During 2008, we repurchased 6,020 shares
of our equity securities registered pursuant to Section 12 of the Securities
Exchange Act of 1934, as amended. We made no purchases on behalf of the Company
or any "affiliated purchaser" (as defined in Rule 10b-18(a)(3) under the
Exchange Act) of the Company's common stock during the three months ended
December 31, 2008.

Item 6 - Selected Financial Data

         The following table sets forth certain historical consolidated
financial data for the periods indicated. The selected historical annual
consolidated statement of operations and balance sheet data as of each of the
fiscal years ended December 31, 2008 and 2007 and are derived from, and are
qualified in their entirety by, our audited consolidated financial statements
included elsewhere in this report. The selected historical annual consolidated
statement of operations data for each of the years ended December 31, 2006, 2005
and 2004 and balance sheet data as of each of the years ended December 31, 2006,
2005 and 2004 are derived from audited consolidated financial statements not
included herein. Historical results are not necessarily indicative of the
results to be expected in the future. You should read the following data
together with "Item 1. Business," "Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations," and our audited consolidated
financial statements and the related notes appearing in "Item 8. Financial
Statements." (dollars in thousands, except per share data).

                                       - 19 -
<PAGE>

<TABLE>
<CAPTION>
                                                         As of and for the Year Ended December 31,
                                                 ---------------------------------------------------------
                                                    2008       2007       2006        2005        2004
                                                 ---------- ---------- ---------- ------------ -----------
Operating Data:
          <S>                                         <C>        <C>        <C>        <C>           <C>
 Total interest income                           $   49,041 $   47,513 $   40,556 $     29,404  $   21,748
 Total interest expense                              23,363     23,699     17,817        9,983       5,811
                                                 ---------- ---------- ---------- ------------  ----------
   Net interest income                               25,678     23,814     22,739       19,421      15,937
 Provision for loan losses                            3,336      1,362        873        1,403       1,596
                                                 ---------- ---------- ---------- ------------  ----------
   Net interest income after provision               22,342     22,452     21,866       18,018      14,341
 Noninterest income                                   5,530      4,071      4,337        3,077       3,849
 Noninterest expense                                 21,992     17,684     15,559       13,354      11,507
                                                 ---------- ---------- ---------- ------------  ----------
      Income before income taxes                      5,880      8,839     10,644        7,741       6,683
 Provision for income taxes                           1,649      3,187      3,627        2,738       2,308
                                                 ---------- ---------- ---------- ------------  ----------
   Net income                                    $    4,231 $    5,652 $    7,017 $      5,003  $    4,375
                                                 ========== ========== ========== ============ ===========

Per Share Data: (Note A)
 Earnings per share - basic                      $     0.65 $     0.92 $     1.15 $       0.84  $     0.75
 Earnings per share - diluted                          0.65       0.91       1.14         0.83        0.75
 Cash dividends declared                               0.33       0.29       0.24         0.22        0.19
 Market price
    High                                              17.00      24.77      28.00        25.00       20.00
    Low                                                6.50      15.50      17.40        17.60       13.44
    Close                                              6.90      15.75      26.75        22.61       17.60
 Book value                                            9.63       8.86       8.04         6.91        6.31

 Weighted average shares outstanding
    Basic                                         6,554,450  6,170,140  6,080,778    5,972,073   5,839,186
    Diluted                                       6,556,767  6,192,559  6,137,222    6,016,319   5,872,418

Selected Year-End Balance Sheet Data:
 Total assets                                    $  924,783 $  708,303 $  608,137 $    522,872  $  398,500
 Loans                                              681,500    545,270    461,763      397,094     312,815
 Allowance for loan losses                            9,542      6,653      5,566        4,965       4,055
 Deposits                                           722,694    537,763    466,868      398,341     315,307
 Short-term borrowings                              114,314     97,000     73,400       74,140      43,160
 Subordinated Debentures                             12,372     12,372     12,372            -           -
 Shareholders' equity                                66,650     54,630     49,323       41,612      37,295

Selected Average Balances:
 Total assets                                    $  832,979 $  655,157 $  560,689 $    449,462  $  376,422
 Loans                                              628,507    494,426    426,768      351,103     298,783
 Total interest-earning assets                      782,435    619,340    528,056      419,307     349,596
 Deposits                                           631,809    505,494    435,991      355,214     295,524
 Total interest-bearing liabilities                 683,619    521,957    435,131      340,798     282,743
 Shareholders' Equity                                66,066     52,246     45,541       39,613      35,135
</TABLE>

                                       - 20 -
<PAGE>

<TABLE>
<CAPTION>
                                                          As of and for the Year Ended December 31,
                                                 ---------------------------------------------------------
                                                    2008       2007       2006        2005        2004
                                                 ---------- ---------- ---------- ------------ -----------

Selected Performance Ratios:
           <S>                                        <C>        <C>        <C>          <C>         <C>
 Return on average assets                             0.51%      0.86%      1.25%        1.11%       1.16%
 Return on average equity                             6.40%     10.82%     15.41%       12.63%      12.45%
 Net interest spread                                  2.85%      3.13%      3.59%        4.08%       4.16%
 Net interest margin (yield)                          3.28%      3.84%      4.31%        4.63%       4.56%
 Net Income to average daily deposits                 0.67%      1.12%      1.61%        1.41%       1.48%
 Noninterest income to total revenue                 10.13%      7.89%      9.66%        9.47%      15.04%
 Noninterest income to average assets                 0.66%      0.62%      0.77%        0.68%       1.02%
 Noninterest expense to average assets                2.64%      2.70%      2.77%        2.97%       3.06%
 Efficiency ratio                                    71.90%     63.49%     57.43%       58.51%      58.58%
 Dividend payout ratio                               50.35%     31.66%     20.80%       26.26%      25.36%

Asset Quality Ratios:
 Nonperforming loans to period-end loans              3.05%      0.23%      0.18%        0.25%       0.30%
 Allowance for loan losses to period-end
  loans                                               1.40%      1.22%      1.21%        1.25%       1.30%
 Allowance for loan losses to
  nonperforming loans                                45.86%    530.54%    663.41%      497.99%     429.56%
 Nonperforming assets to total assets                 2.49%      0.42%      0.20%        0.25%       0.39%
 Net loan charge-offs to average loans                0.29%      0.06%      0.06%        0.14%       0.32%

Capital Ratios:
 Total risk-based capital - Bank                     10.69%     11.88%     12.79%       10.40%      11.80%
 Tier 1 risk-based capital - Bank                     9.44%     10.71%     11.63%        9.19%      10.60%
 Leverage ratio - Bank                                7.43%      8.85%      9.31%        7.66%       8.60%
 Equity to assets ratio                               7.21%      7.71%      8.11%        7.96%       9.36%
 Equity to assets ratio (averages)                    7.93%      7.97%      8.12%        8.81%       9.33%
 Average interest earning assets to average total
  assets                                             93.93%     94.53%     94.18%       93.29%      92.87%
 Average loans to average total deposits             99.48%     97.81%     97.88%       98.84%     101.10%
 Average interest bearing liabilities to average
  interest earning assets                            87.37%     84.28%     82.40%       81.28%      80.88%

Other Data:
 Number of banking offices                              17         14         13           12          10
 Number of full time equivalent
  employees                                            208        177        156          135         131
</TABLE>

Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations.

         The following discussion and analysis provides information about the
major components of our results of operations and financial condition, liquidity
and capital resources and should be read in conjunction with our audited
consolidated financial statements and notes thereto which are contained in this
report. Additional discussion and analysis related to fiscal year 2008 is
contained in our Quarterly Reports on Form 10-Q for the fiscal quarters ended
March 31, 2008, June 30, 2008 and September 30, 2008, respectively.

              Impact of Recent Developments on the Banking Industry
              -----------------------------------------------------

         The banking industry, including the Company, is operating in a
challenging and volatile economic environment. The effects of the downturn in
the housing market have adversely impacted credit markets, consumer confidence,
and the broader economy. Along with other financial institutions, the Company's
stock price has suffered as a result. Management cannot predict when these
market difficulties will subside. While the current economic downturn and the
difficulties it presents for the Company and others in the banking industry are
unprecedented, management believes that the business is cyclical and must be
viewed and measured over time. The Company's primary focus at this time is to
manage the business safely during the economic downturn and be poised to take
advantage of any market opportunities that may arise.

         Because of the current economic situation, U.S. and foreign governments
have acted in attempts to stabilize the financial system. For example, the U.S.
government has adopted the Emergency Economic Stabilization Act, which, among
other things, authorized the U.S. Treasury to establish the Capital Purchase
Program under which certain United States financial institutions may sell senior
preferred stock and issue warrants to purchase an institution's common stock to
the Treasury in exchange for a capital infusion. See "Liquidity and Capital
Resources" below for a more detailed discussion of the Company's potential
participation in this program. It is not clear at this time what impact these
measures will have on the Company or the financial markets as a whole.
Management will continue to monitor the effects of these programs as they
related to the Company and its financial operations.

                                       - 21 -
<PAGE>

         On February 27, 2009, the FDIC proposed amendments to the restoration
plan for the Deposit Insurance Fund. This amendment proposes the imposition of a
20 basis point emergency special assessment on insured depository institutions
as of June 30, 2009. The assessment is proposed to be collected on September 30,
2009. The interim rule would also permit the FDIC to impose an emergency special
assessment after June 30, 2009, of up to 10 basis points if necessary to
maintain public confidence in federal deposit insurance. Based on average
deposits for the fourth quarter, this special assessment, if implemented as
proposed, would equal approximately $1.5 million for the additional 20 basis
points, and a maximum of approximately $727,000 for the possible additional
assessment of up to 10 basis points. This special assessment if implemented as
proposed will have a significant impact on the results of operations of the
Company for fiscal 2009.

         On March 5, 2009, the FDIC Chairman announced that the FDIC intends to
lower the special assessment from 20 basis points to 10 basis points. The
approval of the cutback is contingent on whether Congress passes legislation
that would expand the FDIC's line of credit with the U.S. Treasury to $100
billion. The assessment rates, including the special assessment, are subject to
change at the discretion of the Board of Directors of the FDIC.


Overview

         As a community-focused commercial bank, our primary business consists
of providing a full range of banking services to our customers with an emphasis
on quality personal service. Our core products consist of loans secured by real
estate and commercial and consumer loans as well as various deposit products to
meet our customers' needs. Our primary source of income is generated from net
interest income, the difference between interest income received on our loans
and securities and interest expense paid on deposits and borrowings. Our income
is also affected by our ability to price our products competitively and maximize
the interest rate spread between the interest yield on loans and securities and
the interest rate paid on deposits and borrowings. Our products also generate
other income through product related fees and commissions. We incur operating
expenses consisting primarily of salaries and benefits, occupancy and equipment
and other professional and miscellaneous expenses.

           Our assets have increased from $522.9 million at December 31, 2005 to
$924.8 million at December 31, 2008, primarily due to increased loan demand,
while our total deposits have increased from $398.3 million to $722.7 million
over that same period. In addition, for 72 consecutive years, we have paid
dividends (prior to 1997 when we reorganized into a holding company, it was our
wholly owned subsidiary, Four Oaks Bank & Trust Company, which paid dividends).
For the past five years, dividends have averaged 29.4% of our average net
income. Return on average equity and return on average assets for 2008 were
6.40% and .51%, respectively, decreasing from returns of 10.82% and .86%,
respectively, for 2007.

         We set interest rates on deposits and loans at competitive rates. We
have maintained spreads of 2.85% and 3.13% in 2008 and 2007, respectively,
between interest earned on average loans and investments and interest paid on
average interest-bearing deposits and borrowings. Our gross loans have increased
from $397.1 million at December 31, 2005 to $681.5 million at December 31, 2008;
while our average net annual charge-offs over the same period were approximately
$770,000. The sustained growth provided by operations resulted in increases in
total assets of 30.6%, 16.5%, and 16.3% for 2008, 2007 and 2006, respectively.

         Our gross loans grew 25.0% and 18.1% in 2008 and 2007, respectively.
Our total investments (including interest-earning deposits and FHLB stock)
increased 50.5% and 12.7% in 2008 and 2007, respectively, due to the decision to
build the portfolio as yields have continued to improve throughout 2007 and
2008. We closely monitor changes in the financial markets in order to maximize
the yield on our assets. The growth in loans for 2008 and 2007 was funded by
deposit growth of 34.4% and 15.2%, respectively. Earnings decreased in 2008,
ending the year with net income of $4.2 million, a decrease of 25.1% over 2007's
net income of $5.7 million, as a result of a challenging economic environment.

         During 2008 and 2007, Four Oaks Mortgage Company, L.P. provided
secondary market-type mortgages which contributed $75,000 and $112,000 to our
revenue for the years 2008 and 2007, respectively. Four Oaks Mortgage Company,
L.P. was owned 49.99% by our wholly owned subsidiary, Four Oaks Mortgage
Services, L.L.C., and 50.01% by its general partner, CTX Mortgage Ventures, LLC,
a wholly owned indirect subsidiary of Centex Corporation. In August 2008, CTX
terminated this partnership. On September 1, 2008, we entered into a six-month
marketing agreement with PrimeLending to provide mortgage lending services.

                                       - 22 -
<PAGE>

         In December 2004, we added the Retail Real Estate Lending division,
which works with individuals, developers, and contractors involved in real
estate acquisition and development.

         Management historically has attempted to monitor and control increases
in overhead expenses while being committed to developing the skills and
enhancing the professionalism of our employees. Employee turnover has been
minimal historically, while the number of our full-time equivalent employees has
increased from 135 at December 31, 2005 to 208 at December 31, 2008.

Results of Operations

Comparison of Financial Condition at December 31, 2008 and 2007

         During 2008, our total assets increased by $216.5 million, or 30.6%,
from $708.3 million at December 31, 2007 to $924.8 million at December 31, 2008.
This increase in our total assets resulted primarily from growth in our net
loans, which increased from $538.6 million at December 31, 2007 to $672.0
million at December 31, 2008, an increase of $133.4 million, or 24.8%. The
acquisition of LongLeaf Community Bank ("LongLeaf") on April 17, 2008
contributed $47.2 million of the total loan growth. The sustained growth in our
loan portfolio continued to reflect a trend towards growth in commercial real
estate lending primarily in real estate construction as a result of a continued
shift in our markets from an agricultural focus to a suburban focus. Loans
secured by real estate at December 31, 2008 grew $118.7 million over 2007 of
which $22.2 million of the increase was related to construction and land
development loans. In addition to loan growth, our securities portfolio
increased $57.7 million to $172.0 million at December 31, 2008 from $114.3
million at December 31, 2007. Our loan growth and increases in our securities
portfolio were primarily funded by deposit growth of $184.9 million, or 34.4%,
during 2008 to $722.7 million at December 31, 2008 compared with $537.8 million
at December 31, 2007. Our local market customers continue to be our primary
source for deposit growth, funding deposit growth predominantly in savings and
time deposits. Deposits from our local market customers provided $77.0 million
of the December 31, 2008 increase in deposits over December 31, 2007, and with
the remaining $107.9 million increase coming from deposits outside our local
customer base. The LongLeaf acquisition accounted for $54.5 million of the total
deposit growth. We believe the growth in deposits was encouraged by targeted
deposit campaigns and branch calling efforts within our competitive market, in
spite of the national prime decrease from 7.25% at January 1, 2008 to 3.25% at
December 31, 2008.

         Shareholders' equity increased by $12.00 million as of December 31,
2008 as compared to December 31, 2007. This increase in shareholders' equity
resulted principally from shares of common stock valued at $7.6 million issued
and stock options valued at $389,000 in connection with the merger with
LongLeaf, net income of $4.2 million, dividend reinvestment plan proceeds of
$1.2 million, proceeds from the exercise of stock options of $502,000 and
employee stock purchase plan proceeds of $149,000, net of dividends paid of $2.2
million, stock repurchase expenses of $75,000 and other comprehensive loss of
$33,000 comprised of unrealized losses on securities available for sale.

Net Income

         During 2008, we earned net income of $4.2 million, or $.65 basic net
income per share, which was a 25.1% decrease from 2007 net income of $5.7
million, or $.92 basic net income per share. Strong competition for deposits in
our local markets prevented deposit rates from lowering at the same pace as loan
rates, causing a decline in our net interest margin. The resulting $1.5 million,
or 3.2%, increase in interest income failed to absorb a 24.4% increase in
non-interest expense for 2008 over 2007. Opening and operating two new
full-service offices during 2008 and the addition of the two offices acquired
from the merger with LongLeaf contributed to increased salaries and benefits,
occupancy and equipment and other operating costs, along with the upfitting of
the new Garner Village location. In addition to the new offices, rising costs in
employee salaries contributed to increased personnel expense in 2008.

Net Interest Income

         Like most financial institutions, the primary component of earnings for
the bank is net interest income. Net interest income is the difference between
interest income, principally from loan and investment securities, and interest
expense, principally on customer deposits and borrowings. Changes in net
interest income result from changes in volume, spread and margin. For this
purpose, volume refers to the average dollar level of interest-earning assets
and interest-bearing liabilities, spread refers to the difference between the
average yield on interest-earning assets and the average cost of
interest-bearing liabilities, and margin refers to net interest income divided
by average interest-earning assets. Margin is influenced by the level and
relative mix of interest-earning assets and interest-bearing liabilities, as
well as by levels of non-interest-bearing liabilities and capital.

                                       - 23 -
<PAGE>

         Net interest income increased by $1.9 million to $25.7 million in 2008,
with a net yield of 3.28% compared to $23.8 million and a net yield of 3.84% in
2007. The yield for 2008 decreased an overall 56 basis points from 2007 due to
the decreasing rates on variable rate loans. The increase in net interest income
primarily was generated by an increased volume of $9.9 million in average net
interest-earning assets, which produced $1.9 million in net interest income. The
additional interest income over interest expense was driven by steady loan
growth, acquisition of higher yielding investments as well as an increase of
$1.6 million in average non-interest-bearing demand deposits. The rates earned
on a substantial portion of our loans reprice to correspond with each prime rate
decrease. Most of our interest-bearing liabilities, however, have fixed interest
rates until maturity and as a result do not reprice as quickly or in the same
increments as our loan portfolio. The national prime decreased 400 basis points
during 2008 to 3.25% at December 31, 2008 from 7.25% at January 1, 2008. Prime
rate decreased seven times in late 2008, which accounts for the decrease in net
interest margin for 2008.

         On average, our interest-earning assets grew $163.1 million during 2008
over 2007. A substantial portion of the increase in interest-earning assets was
achieved through increased loan demand. Average loans increased by $134.1
million during 2008 over 2007 to $628.5 million. Average available-for-sale
investments increased $21.6 million generating additional interest income of
$1.2 million. Although the volume of interest-bearing liabilities increased
$161.7 million in 2008, a slight decrease in interest expense resulted from the
rapidly falling interest rates in the second half of 2008.

Provision for Loan Losses and Asset Quality

         Our provision for loan losses was $3.3 million during 2008 and $1.4
million during 2007. Net charge-offs in 2008 increased to $1.8 million compared
to $275,000 in 2007. As a percent of average loans, net charge-offs were 0.29%,
the highest level in the past five years, an increase of 0.23% from 2007. The
higher level of net charge-offs and nonperforming assets is attributable to the
challenging economic environment especially in the real estate and commercial
construction sectors caused by recessionary conditions such as increased
unemployment and declines in asset values.

         The provision for loan losses is charged to bring the allowance for
loan losses to the level deemed appropriate by management after adjusting for
recoveries of amounts previously charged off. Loans are charged against the
allowance for loan losses when management believes that the uncollectibility of
a loan balance is confirmed. The allowance for loan losses is maintained at a
level deemed adequate to absorb probable losses inherent in the loan portfolio
and results from management's consideration of such factors as the financial
condition of borrowers, past and expected loss experience, current economic
conditions, and other factors management feels deserve recognition in
establishing an appropriate reserve. Although management attempts to maintain
the allowance at a level deemed adequate, future additions to the allowance may
be necessary based upon changes in market conditions or the status of the loans
included in the loan portfolio. In addition, various regulatory agencies
periodically review our allowance for loan losses. These agencies may require us
to make adjustments based upon their judgments about information available to
them at the time of their examination. See "Allowance for Loan Losses and
Summary of Loan Loss Experience" below. We evaluate our loan portfolio in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 114,
Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118,
Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures. Under these standards, a loan is considered impaired, based on
current information and events, if it is probable that we will be unable to
collect the scheduled payments of principal and interest when due according to
the contractual terms of the loan agreement. Uncollateralized loans are measured
for impairment based on the present value of expected future cash flows
discounted at the historical effective interest rate or the loan's observable
market price, while all collateral-dependent loans are measured for impairment
based on the fair value of the collateral. If the recorded investment in the
loan exceeds the measure of fair value, a valuation allowance is established as
a component of the allowance for loan losses. This evaluation is inherently
subjective, as it requires material estimates that may be susceptible to
significant change.

         Our non-performing assets, which consist of loans past due 90 days or
more, real estate acquired in the settlement of loans, and loans in nonaccrual
status, increased to $23.0 million at December 31, 2008 from $3.0 million at
December 31, 2007. This increase was primarily due to the contraction of the
housing market and subsequent slowdown of real estate construction, resulting
from the current economic environment. Our allowance for loan losses, expressed
as a percentage of gross loans, was 1.40% and 1.22% at December 31, 2008 and
2007, respectively. At December 31, 2008, the allowance for loan losses amounted
to $9.5 million, which management believes is adequate to absorb losses inherent
in our loan portfolio.

                                       - 24 -
<PAGE>

Non-interest Income

         Non-interest income before gains and losses on sales of securities,
hedging activity and loans increased $900,000, or 24.2%, from $3.9 million
during 2007 to $4.8 million in 2008. Our non-interest income is comprised
primarily of service charges on deposit accounts, financial services
commissions, merchant fees, changes in the value of bank-owned life insurance
and various other sources of miscellaneous operating income. Net gains of
$673,000 on sales of investment securities and interest rate hedging activity
were recognized in 2008. The primary component of the increase in non-interest
income is income on the cash surrender value of the bank-owned life insurance
policy, resulting in income of $525,000 for the year ended December 31, 2008, as
compared to a net loss of $205,000 in 2007.

Non-interest Expense

         Our non-interest expense increased from $17.7 million in 2007 to $22.0
million in 2008, an increase of $4.3 million. Although our non-interest expense
has continued to increase, our non-interest expense as a percent of our average
assets has declined over the last five years, down to 2.64% for 2008, our lowest
level in the last five years. Approximately 46.2% of the $4.3 million increase
in non-interest expense over 2007 was due to increases in salaries and benefits.
Salaries increased 21.4% while employee benefits increased 24.9%, primarily due
to a 17.5% increase in the number of employees in 2008 over 2007. In addition to
normal salary increases and increased costs for employee benefits overall,
personnel costs grew due to additional staffing needs throughout the bank. In
total, our number of full time equivalent employees grew from 177 employees for
the year 2007 to 208 employees for the year 2008. The increased personnel costs
reflect the costs of additional personnel for the new Garner Village,
Rockingham, and Southern Pines offices as well as increased staffing for the
administration and operations departments. The primary increases in other
non-interest expense for 2008 over 2007 included advertising expense, up
$157,000, printing and office supplies, up $72,000, ATM expense, up $130,000,
FDIC insurance premium, up $293,000, and expenses relating to the collection of
non-performing loans and sale of repossessed assets, up $233,000. There were no
other significant increases in the remaining other non-interest expense
categories.

Income Taxes

         Income taxes, as a percentage of income before income taxes, for 2008
and 2007 were 28.04% and 36.06%, respectively. The decrease resulted because
non-taxable income from investment securities and bank-owned life insurance
comprised a larger portion of income before taxes in the current year.


Results of Operations

Comparison of Financial Condition at December 31, 2007 and 2006

         During 2007, our total assets increased by $100.2 million, or 16.5%,
from $608.1 million at December 31, 2006 to $708.3 million at December 31, 2007.
This increase in our total assets resulted primarily from growth in our net
loans, which increased from $456.2 million at December 31, 2006 to $538.6
million at December 31, 2007, an increase of $82.4 million, or 18.1%. The
sustained growth in our loan portfolio continues to reflect a trend towards
growth in commercial real estate lending primarily in real estate construction
as a result of a continued shift in our markets from an agricultural focus to a
suburban focus. Loans secured by real estate at December 31, 2007 of which $58.0
million was related to construction and land development loans, grew $78.4
million over 2006. In addition to loan growth, our securities portfolio
increased $12.9 million to $114.3 million at December 31, 2007 from $101.4
million at December 31, 2006. Our loan growth and increases in our securities
portfolio were primarily funded by deposit growth of $70.9 million, or 15.2%,
during 2007 to $537.8 million at December 31, 2007 compared with $466.9 million
at December 31, 2006. Our local market customers continue to be our primary
source for deposit growth, funding deposit growth predominantly in savings and
time deposits. Deposits from our local market customers provided $65.6 million
of the December 31, 2007 increase in deposits over December 31, 2006, and with
the remaining $5.3 million increase coming from deposits outside our local
customer base. We believe the growth in deposits was encouraged by targeted
deposit campaigns and branch calling efforts within our competitive market, in
spite of the national prime decrease from 8.25% at January 1, 2007 to 7.25% at
December 31, 2007.

                                       - 25 -
<PAGE>

         Shareholders' equity increased by $5.3 million as of December 31, 2007
as compared to December 31, 2006. This increase resulted from our net income of
$5.7 million, dividend reinvestment plan proceeds of $1.3 million, proceeds from
the exercise of stock options of $362,000 and employee stock purchase plan
proceeds of $141,000, net of dividends paid of $1.8 million, stock repurchase
expenses of $1.5 million and other comprehensive gain of $855,000 comprised of
unrealized gains on securities available for sale of $613,000, net of tax and
unrealized gains on cash flow hedging activities of $242,000 net of tax.

Net Income

         During 2007, we earned net income of $5.7 million, or $.92 basic net
income per share, which was a 19.5% decrease over 2006 net income of $7.0
million, or $1.15 basic net income per share. Increased competition for deposits
in our local markets caused interest expense to increase, causing a decline in
our net interest margin. The resulting $1.1 million, or 4.7%, increase in
interest income failed to absorb a 13.7% increase in non-interest expense for
2007 over 2006. A full year of opening and operating two new full-service
offices during 2007 contributed to increased salaries and benefits, occupancy
and equipment and other operating costs, along with costs associated with the
completion of the new building for Zebulon and the upfitting of the new Dunn
location. In addition to the new offices, rising costs in employee salaries
contributed to increased personnel expense in 2007. Compliance costs related to
the Sarbanes-Oxley Act of 2002 increased costs for outside professional services
for 2007.

Net Interest Income

         Like most financial institutions, the primary component of earnings for
the bank is net interest income. Net interest income is the difference between
interest income, principally from loan and investment securities, and interest
expense, principally on customer deposits and borrowings. Changes in net
interest income result from changes in volume, spread and margin. For this
purpose, volume refers to the average dollar level of interest-earning assets
and interest-bearing liabilities, spread refers to the difference between the
average yield on interest-earning assets and the average cost of
interest-bearing liabilities, and margin refers to net interest income divided
by average interest-earning assets. Margin is influenced by the level and
relative mix of interest-earning assets and interest-bearing liabilities, as
well as by levels of non-interest-bearing liabilities and capital.

         Net interest income increased by $1.1 million to $23.8 million in 2007,
with a net yield of 3.84% compared to $22.7 million and a net yield of 4.31% in
2006. However, the yield for 2007 decreased overall 47 basis points from 2006
due to the increasing costs of deposits and borrowings. The increase in net
interest income primarily was generated by an increased volume of $5.4 million
in average net interest-earning assets, which produced $1.1 million in net
interest income. The additional interest income over interest expense was driven
by steady loan growth, acquisition of higher yielding investments as well as an
increase of $2.1 million in average non-interest-bearing demand deposits. The
rates earned on a substantial portion of our loans reprice to correspond with
each prime rate increase. Most of our interest-bearing liabilities, however,
have fixed interest rates until maturity and as a result do not reprice as
quickly or in the same increments as our loan portfolio. The national prime
decreased 100 basis points during 2007 to 7.25% at December 31, 2007 from 8.25%
at January 1, 2007. Prime rate decreased three times in late 2007, which
accounts for the decrease in net interest margin for 2007.

         On average, our interest-earning assets grew $91.3 million during 2007
over 2006. A substantial portion of the increase in interest-earning assets was
achieved through increased loan demand. Average loans increased by $67.7 million
during 2007 over 2006 to $494.4 million, generating additional interest income
of $5.5 million. An increase in volume of interest-bearing liabilities of $85.8
million in 2007 resulted in additional interest expense of $3.7 million, while
increased competition for deposits in our local markets resulted in increased
interest expense of $2.2 million. The increase in interest expense in 2007
primarily resulted from a $27.0 million increase in more expensive other time
deposits at an average rate paid on these deposits of 5.02%, which was an
increase of 77 basis points over 2006. However, an increase of $36.7 million in
less expensive NOW and money market deposits at an average rate paid of 3.59%
and an increase of $2.1 million in interest free demand deposits in 2007
partially offset the increased cost of other time deposits. Interest expense on
subordinated debt associated with our Trust Preferred Securities increased from
$626,000 in 2006 to $850,000 in 2007. The average outstanding balance of
subordinated debt increased from $9.4 million in 2006 to $12.4 million in 2007,
as we completed a $12 million offering of Trust Preferred Securities in late
March 2006. The Trust Preferred Securities pay cumulative cash distributions
quarterly at an annual rate, reset quarterly, equal to three month LIBOR plus
1.35%.

Provision for Loan Losses and Asset Quality

         Our provision for loan losses was $1.4 million during 2007 and $873,000
million during 2006. Net charge-offs in 2007 increased to $275,000 compared to
$272,000 in 2006. As a percent of average loans, net charge-offs were 0.06%, the
lowest level in the past five years and unchanged from 2006. The lower level of
net charge-offs and nonperforming assets is attributable to continued efforts to
improve asset quality, including improved underwriting.

                                       - 26 -
<PAGE>

         The provision for loan losses is charged to bring the allowance for
loan losses to the level deemed appropriate by management after adjusting for
recoveries of amounts previously charged off. Loans are charged against the
allowance for loan losses when management believes that the uncollectibility of
a loan balance is confirmed. The allowance for loan losses is maintained at a
level deemed adequate to absorb probable losses inherent in the loan portfolio
and results from management's consideration of such factors as the financial
condition of borrowers, past and expected loss experience, current economic
conditions, and other factors management feels deserve recognition in
establishing an appropriate reserve. Although management attempts to maintain
the allowance at a level deemed adequate, future additions to the allowance may
be necessary based upon changes in market conditions or the status of the loans
included in the loan portfolio. In addition, various regulatory agencies
periodically review our allowance for loan losses. These agencies may require us
to make adjustments based upon their judgments about information available to
them at the time of their examination. See "Allowance for Loan Losses and
Summary of Loan Loss Experience" below. We evaluate our loan portfolio in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 114,
Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118,
Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures. Under these standards, a loan is considered impaired, based on
current information and events, if it is probable that we will be unable to
collect the scheduled payments of principal and interest when due according to
the contractual terms of the loan agreement. Uncollateralized loans are measured
for impairment based on the present value of expected future cash flows
discounted at the historical effective interest rate or the loan's observable
market price, while all collateral-dependent loans are measured for impairment
based on the fair value of the collateral. If the recorded investment in the
loan exceeds the measure of fair value, a valuation allowance is established as
a component of the allowance for loan losses. This evaluation is inherently
subjective as it requires material estimates that may be susceptible to
significant change.

         Our non-performing assets, which consist of loans past due 90 days or
more, real estate acquired in the settlement of loans, and loans in nonaccrual
status, increased to $3.0 million at December 31, 2007 from $1.3 million at
December 31, 2006. This increase was primarily due to properties valued at
approximately $2.6 million being added to other real estate owned during 2007,
and to a lesser degree, the contraction of the housing market and subsequent
slowdown of real estate construction. Our allowance for loan losses, expressed
as a percentage of gross loans, was 1.22% and 1.21% at December 31, 2007 and
2006, respectively. At December 31, 2007, the allowance for loan losses amounted
to $6.7 million, which management believes is adequate to absorb losses inherent
in our loan portfolio.

Non-interest Income

         Non-interest income before gains and losses on sales of securities,
hedging activity and loans decreased $744,000, or 16.1%, from $4.6 million
during 2006 to $3.9 million in 2007. Our non-interest income is comprised
primarily of service charges on deposit accounts, financial services
commissions, merchant fees, changes in the value of bank-owned life insurance
and various other sources of miscellaneous operating income. Net gains of
$512,000 on sales of investment securities and interest rate hedging activity
were recognized in 2007. The primary component of the decrease in non-interest
income is a loss on the surrender of the previous bank-owned life insurance
policy and the subsequent purchase of a new policy, resulting in a net loss of
$205,000 for the year ended December 31, 2007, as compared to a net gain of
$549,000 in 2006.

Non-interest Expense

         Our non-interest expense increased from $15.5 million in 2006 to $17.7
million in 2007, an increase of $2.2 million. Although our non-interest expense
has continued to increase, our non-interest expense as a percent of our average
assets has declined over the last five years, down to 2.70% for 2007, our lowest
level in the last five years. Approximately 70.3% of the $2.2 million increase
in non-interest expense over 2006 was due to increases in salaries and benefits.
Salaries increased 17.9% while employee benefits increased 14.4%, primarily due
a 13.5% increase in the number of employees in 2007 over 2006. In addition to
normal salary increases and increased costs for employee benefits overall,
personnel costs grew due to additional staffing needs throughout the bank. In
total, our number of full time equivalent employees grew from 156 employees for
the year 2006 to 177 employees for the year 2007. The increased personnel costs
reflect the costs of additional personnel for the new Dunn loan production
office as well as increased staffing for the administration and operations
departments. In addition to personnel costs, additional costs during 2007 were
incurred for occupancy expense. For 2007, occupancy expense increased $118,000
over 2006. Additional testing and documentation required for compliance with the
Sarbanes-Oxley Act of 2002 continued to increase our fees paid for outside
professional services in 2007, contributing to an increase of $80,000 over 2006.
The primary increases in other non-interest expense for 2007 over 2006 included
advertising expense, up $28,000, printing and office supplies, up $21,000, auto
expense, up $17,000, meals, entertainment and travel, up $30,000, donations and
charities expense, up $58,000, ATM expense, up $77,000, postage, up $32,000, and
expenses relating to the collection of non-performing loans and sale of
repossessed assets, up $34,000. There were no other significant increases in the
remaining other non-interest expense categories.

                                       - 27 -
<PAGE>

Income Taxes

         Income taxes, as a percentage of income before income taxes, for 2007
and 2006 were 36.06% and 34.08%, respectively. The increase was the result of
management's redirection of funds between loans and different types of taxable
and tax-exempt interest-bearing assets in response to economic conditions and
the bank's liquidity requirements.


Liquidity and Capital Resources

         The United States Department of the Treasury ("Treasury") has announced
that it will make funds available to certain banks under the Troubled Asset
Relief Program's Capital Purchase Program (the "Program"). The Emergency
Economic Stabilization Act of 2008 authorized the Treasury to establish the
Program under which certain United States financial institutions may sell senior
preferred stock and issue warrants to purchase an institution's common stock to
the Treasury in exchange for a capital infusion. Under the Program, eligible
institutions can generally apply to issue preferred stock to the Treasury in
aggregate amounts between 1% and 3% of the institution's risk-weighted assets.
On November 5, 2008, the Company's board of directors (the "Board") authorized
and approved the Company's participation in the Program, and the Company filed
its application with the Treasury in November, 2008 to participate in the
Program. In order to participate in the Program, the Company's shareholders
approved an amendment to the Company's Articles of Incorporation to authorize
preferred stock, and the Board authorized the Company to sell up to 20,000
shares of senior preferred stock ("Senior Preferred") to the Treasury for $1,000
per share. As of the filing date of this report, we are currently waiting to
hear about the status of our application.

         Accordingly, there is no binding agreement or commitment with respect
to the Company's participation in the Program. The Company and the Treasury must
still negotiate the terms and conditions of the Company's participation in the
Program, which means that closing of the transaction is not guaranteed. Although
the Company has no reason to believe that the Company will not be able to
ultimately participate in the Program, no assurances can be given that the
Company will be able to ultimately participate in the Program, the approximate
number of shares of preferred stock that the Company may issue pursuant to the
Program or the approximate amount of consideration the Company will receive as
compensation from the Treasury for any such shares that may be issued by the
Company under the Program.

         Market and public confidence in our financial strength and in the
strength of financial institutions in general will largely determine our access
to appropriate levels of liquidity. This confidence is significantly dependent
on our ability to maintain sound asset quality and appropriate levels of capital
resources. The term "liquidity" refers to our ability to generate adequate
amounts of cash to meet our needs for funding loan originations, deposit
withdrawals, maturities of borrowings and operating expenses. Management
measures our liquidity position by giving consideration to both on and
off-balance sheet sources of, and demands for, funds on a daily and weekly
basis.

         Sources of liquidity include cash and cash equivalents, (net of federal
requirements to maintain reserves against deposit liabilities), investment
securities eligible for pledging to secure borrowings, investments available for
sale, loan repayments, loan sales, deposits and borrowings from the Federal Home
Loan Bank secured with pledged loans and securities, and from correspondent
banks under overnight federal funds credit lines. In addition to interest rate
sensitive deposits, the Company's primary demand for liquidity is anticipated
funding under credit commitments to customers.

         We have maintained a sufficient level of liquidity in the form of cash,
federal funds sold, and investment securities. These aggregated $200.9 million
at December 31, 2008, compared to $132.6 million and $119.1 million at December
31, 2007 and 2006, respectively. The increase in 2008 primarily resulted from a
$216.5 million increase in total assets.

                                       - 28 -
<PAGE>

         Supplementing customer deposits as a source of funding, we have
available lines of credit from various correspondent banks to purchase federal
funds on a short-term basis of approximately $38.2 million. As of December 31,
2008, the Bank has the credit capacity to borrow up to $185.0 million, from the
Federal Home Loan Bank of Atlanta ("FHLB"), with $114.3 million outstanding as
of that date. At December 31, 2007 we had FHLB borrowings outstanding of $97.0
million.

         At December 31, 2008, our outstanding commitments to extend credit
consisted of loan commitments of $98.5 million, undisbursed lines of credit of
$21.5 million, financial stand-by letters of credit of $874,000 and performance
stand-by letters of credit of $2.1 million. We believe that our combined
aggregate liquidity position from all sources is sufficient to meet the funding
requirements of loan demand and deposit maturities and withdrawals in the near
term.

         In recent years, we have relied heavily on certificates of deposits as
a source of funds. While the majority of these funds are from our local market
area, the Bank has utilized brokered and out-of-market certificates of deposits
to diversify and supplement our deposit base. In late 2008, we began to shift
our focus from certificates of deposits to expanding our nonmaturity deposit
base. Certificates of deposits represented 64% of our total deposits at December
31, 2008, an increase from 57% at December 31, 2007. Brokered and out-of-market
certificates of deposit totaled $144.3 million at year-end 2008 and $47.0
million at year-end 2007, which comprised 20.0% and 8.7% of total deposits,
respectively. Certificates of deposit of $100,000 or more, inclusive of brokered
and out-of-market certificates, represented 38.5% of our total deposits at
December 31, 2008 and 32.1% at December 31, 2007. Large certificates of deposits
are generally considered rate sensitive. While we will need to pay competitive
rates to retain these deposits at their maturities, there are other subjective
factors that will determine their continued retention.

Off-Balance Sheet Arrangements

         As part of its normal course of business to meet the financing needs of
its customers, the bank is at times a party to financial instruments with
off-balance sheet credit risk. Such instruments include commitments to extend
credit and standby letters of credit. At December 31, 2008, the bank's
outstanding commitments to extend credit consisted of undisbursed lines of
credit, other commitments to extend, undisbursed portion of construction loans
and stand-by letters of credit of $122.9 million. Additional detail regarding
the bank's off-balance sheet risk exposure is presented in Notes K and L to the
accompanying consolidated financial statements.

Interest Rate Sensitivity Analysis

          As a part of our interest rate risk management policy, we periodically
perform an interest rate sensitivity analysis. Interest rate sensitivity
analysis is a common, though imperfect, measure of interest rate risk, which
measures the relative dollar amounts of interest-earning assets and
interest-bearing liabilities that reprice within a specific time period, either
through maturity or rate adjustment. Any resulting interest rate "gap" is the
difference between the amounts of such assets and liabilities that are subject
to repricing. A positive gap for a given period means that the amount of
interest-earning assets maturing or otherwise repricing within that period
exceeds the amount of interest-bearing liabilities maturing or otherwise
repricing within the same period. Accordingly, in a declining interest rate
environment, an institution with a positive gap would generally be expected,
absent the effects of other factors, to experience a decrease in the yield on
its assets greater than the decrease in the cost of its liabilities, and its net
interest income should be negatively affected. Conversely, the yield on its
assets for an institution with a positive gap would generally be expected to
increase more quickly than the cost of funds in a rising interest rate
environment, and such institution's net interest income generally would be
expected to be positively affected by rising interest rates. Changes in interest
rates generally have the opposite effect on an institution with a negative gap.

         The table below sets forth the amounts of our interest-earning assets
and interest-bearing liabilities outstanding as of December 31, 2008 that are
projected to reprice or mature in each of the future time periods shown. Except
as stated below, the amounts of assets and liabilities shown that reprice or
mature within a particular period were determined in accordance with the
contractual terms of the assets or liabilities. Loans with adjustable rates are
shown as being due at the end of the next upcoming adjustment period. Money
market deposit accounts and negotiable order of withdrawal or other transaction
accounts are assumed to be subject to immediate repricing and depositor
availability and have been placed in the shortest period. In making the gap
computations, none of the traditional assumptions regarding prepayment rates and
deposit decay rates have been used for any interest-earning assets or
interest-bearing liabilities. In addition, the table does not reflect scheduled
principal payments that will be received throughout the lives of the loans or
investments. The interest rate sensitivity of our assets and liabilities
illustrated in the following table would vary substantially if different
assumptions were used or if actual experience differs from that indicated by
such assumptions. (dollars in thousands).

                                       - 29 -
<PAGE>

<TABLE>
<CAPTION>
                                                Interest Rate Sensitivity as of December 31, 2008
                                     ----------------------------------------------------------------------
                                        3 Months    Over 3 Months  Total Within     Over 12
                                        or Less      to 12 Months   12 Months        Months        Total
                                     -------------- -------------- ------------  -------------- -----------

Interest-earning assets:
              <S>                         <C>            <C>            <C>           <C>            <C>
   Loans                             $     328,387  $      58,365  $  386,752    $     294,748  $  681,500
   Securities available for sale                 -            569         569          171,422     171,991
   Other earning assets                      9,303              -       9,303            6,529      15,832
                                     -------------- -------------- ------------  -------------- -----------
      Total interest-earning assets  $     337,690  $      58,934  $  396,624    $     472,699  $  869,323
                                     ============== ============== ============  ============== ===========

   Percent of total interest-
    earning assets                           38.85%          6.78%      45.62%           54.38%     100.00%
   Cumulative percent of total
    interest-earning assets                  38.85%         45.62%      45.62%          100.00%     100.00%

Interest-bearing liabilities
   Fixed maturity deposits           $     190,471  $     222,985  $  413,456    $      51,118  $  464,574
   All other deposits                      184,148              -     184,148                -     184,148
   Borrowings                                1,500              -       1,500          112,814     114,314
                                     -------------- -------------- ------------  -------------- -----------
      Total interest-bearing
       liabilities                   $     376,119  $     222,985  $  599,104    $     163,932  $  763,036
                                     ============== ============== ============  ============== ===========

   Percent of total interest-bearing
    liabilities                              49.29%         29.22%      78.52%           21.48%     100.00%
   Cumulative percent of total
    interest-bearing liabilities             49.29%         78.52%      78.52%          100.00%     100.00%

Interest sensitivity gap             $     (38,429) $    (164,051) $ (202,480)   $     308,766  $  106,286
Cumulative interest sensitivity gap        (38,429)      (202,480)   (202,480)         106,286     106,286
Cumulative interest sensitivity gap
 as a percent of total interest-
 earning assets                              -4.42%        -23.29%     -23.29%           12.23%      12.23%
Cumulative ratio of interest-
 sensitive assets to interest-sensitive
    liabilities                              89.78%         66.20%      66.20%          113.93%     113.93%
</TABLE>

Contractual Obligations and Commitments

         In the normal course of business there are various outstanding
contractual obligations that require future cash outflows. The following table
shows our expected contractual obligations and future operating lease
commitments as of December 31, 2008 (in thousands):

<TABLE>
<CAPTION>
                                                      Payments Due by Period
                                    ---------------------------------------------------------
                                                  Less than                        More than
                                       Total       1 year    1-2 years  3-5 years   5 years
                                    ----------- ----------------------- ---------- ----------

           <S>                           <C>         <C>          <C>        <C>        <C>
Borrowings                          $   114,314 $      1,500 $        - $      814 $  112,000
Subordinated debentures                  12,372            -          -          -     12,372
Operating leases                          1,089          187        169        476        257
Deposits                                464,574      413,456     42,300      8,718        100
                                    ----------- ------------ ---------- ---------- ----------
Total                               $   592,349 $    415,143 $   42,469 $   10,008 $  124,729
                                    =========== ============ ========== ========== ==========
</TABLE>

                                       - 30 -
<PAGE>

         The following table shows our undisbursed lines of credit, other
commitments to extend, undisbursed portion of construction loans and stand-by
letters of credit as of December 31, 2008 (in thousands):

<TABLE>
<CAPTION>
                                             Amount of Commitment Expiration Per Period
                                    ------------------------------------------------------------
                                                  Less than                           More than
                                       Total       1 year    1-2 years    3-5 years    5 years
                                    ----------- ----------------------- ------------- ----------

          <S>                            <C>         <C>          <C>        <C>           <C>
Undisbursed lines of credit         $    39,450 $     3,312  $   11,363 $       1,974 $   22,802
Other commitments to extend              27,836      18,570       9,247            14          4
Undisbursed portion of construction
 loans                                   52,672      41,380      11,101            58        132
Stand-by letters of credit                2,940       2,628          34           278          -
                                    ----------- -----------  ---------- ------------- ----------
   Total                            $   122,898 $    65,891  $   31,745 $       2,324 $   22,938
                                    =========== ===========  ========== ============= ==========
</TABLE>

Inflation

         The effect of inflation on financial institutions differs somewhat from
the effect it has on other businesses. The performances of banks, with assets
and liabilities that are primarily monetary in nature, are affected more by
changes in interest rates than by inflation. Interest rates generally increase
as the rate of inflation increases, but the magnitude of the change in rates may
not be the same. During periods of high inflation, there are normally
corresponding increases in the money supply, and banks will normally experience
above average growth in assets, loans, and deposits. Also, general increases in
the price of goods and services will generally result in increased operating
expenses.

Distribution of Assets,  Liabilities,  and Shareholders' Equity;  Interest Rates
and Interest Differential

         The following schedule presents average balance sheet information for
the years 2008, 2007 and 2006, along with related interest earned and average
yields for interest-earning assets and the interest paid and average rates for
interest-bearing liabilities. Nonaccrual notes are included in loan amounts.

                                       - 31 -
<PAGE>

<TABLE>
<CAPTION>
                                       Average Daily Balances, Interest Income/Expense, Average Yield/Rate

                                                        For the Years Ended December 31,
                            -----------------------------------------------------------------------------------------
                                        2008                          2007                          2006
                            ----------------------------- ----------------------------- -----------------------------
                             Average             Average   Average             Average   Average             Average
                             Balance   Interest    Rate    Balance   Interest    Rate    Balance   Interest    Rate
                            ---------- --------- -------- ---------- --------- -------- ---------- --------- --------
                                                             (dollars in thousands)
Interest-earning assets:
         <S>                   <C>        <C>       <C>      <C>        <C>        <C>     <C>          <C>      <C>
 Loans                      $ 628,507  $  41,182    6.55% $ 494,426  $  40,967    8.29% $ 426,768  $  35,457    8.31%
 Investment securities -
  taxable                     123,452      6,646    5.38%   111,837      5,873    5.25%    89,195      4,503    5.05%
 Investment securities -
  tax exempt                   14,783        627    4.24%     4,846        178    3.68%     4,123        152    3.69%
 Other interest-earning
  assets                       15,693        586    3.73%     8,231        495    6.01%     7,970        444    5.57%
                            ---------  ---------          ---------  ---------          ---------  ---------

  Total interest-earning
   assets                     782,435     49,041    6.27%   619,340     47,513    7.67%   528,056     40,556    7.68%
                                       --------- --------            --------- --------            --------- --------

Other assets                   50,544                        35,817                        32,633
                            ---------                     ---------                     ---------

  Total assets              $ 832,979                     $ 655,157                     $ 560,689
                            =========                     =========                     =========

Interest-bearing
 liabilities:
 Deposits:
 NOW and money market
  deposits                  $ 129,411  $   2,655    2.05% $ 107,520  $   3,860    3.59% $  71,981  $   2,079    2.89%
 Savings deposits              28,878        448    1.55%    30,068        800    2.66%    37,304      1,079    2.89%
 Time deposits, $100,000
  and over                    219,589      8,747    3.98%   166,744      8,164    4.90%   157,497      6,961    4.42%
 Other time deposits          176,979      6,528    3.69%   125,875      6,317    5.02%    96,058      4,083    4.25%
 Borrowed funds               116,390      4,411    3.79%    79,378      3,708    4.67%    63,885      2,989    4.68%
 Subordinated debentures       12,372        575    4.65%    12,372        850    6.87%     9,389        626    6.67%
                            ---------  ---------          ---------  ---------          ---------  ---------

  Total interest-bearing
   liabilities                683,619     23,363    3.42%   521,958     23,699    4.54%   436,114     17,817    4.09%
                                       --------- --------            --------- --------            --------- --------

 Noninterest-bearing
  deposits                     76,951                        75,286                        73,151
 Other liabilities              6,343                         5,668                         5,883
 Stockholders' equity          66,066                        52,246                        45,541
                            ---------                     ---------                     ---------

  Total liabilities and
     stockholders' equity   $ 832,979                     $ 655,157                     $ 560,689
                            =========                     =========                     =========

  Net interest income and
     interest rate spread              $  25,678    2.85%            $  23,814    3.13%            $  22,739    3.59%
                                       ========= ========            ========= ========            ========= ========
  Net yield on average
   interest-earning assets                          3.28%                         3.84%                         4.31%
                                                 ========                      ========                      ========

  Ratio of average
   interest-earning assets to
      average
   interest-bearing
      liabilities              114.45%                       118.66%                       121.08%
                            ==========                    ==========                    ==========
</TABLE>

                                       - 32 -
<PAGE>

         The following table shows changes in interest income and expense by
category and rate/volume variances for the years ended December 31, 2008 and
2007. The changes due to rate and volume were allocated on their absolute
values:

<TABLE>
<CAPTION>
                                                                Year Ended                           Year Ended
                                                        December 31, 2008 vs. 2007           December 31, 2007 vs. 2006
                                                   ------------------------------------- -----------------------------------
                                                        Increase (Decrease) Due to           Increase (Decrease) Due to
                                                   ------------------------------------- -----------------------------------
                                                      Volume        Rate       Total        Volume       Rate       Total
                                                   ------------- ---------- ------------ ------------ ---------- -----------
                                                                                (In thousands)
Interest income:
             <S>                                        <C>           <C>        <C>          <C>          <C>        <C>
   Loans                                           $      9,948  $  (9,733) $       215  $     5,614  $    (103) $    5,511
   Investment securities - taxable                          618        156          774        1,166        204       1,370
   Investment securities - tax exempt                       394         55          449           26          -          26
   Other interest-earning assets                            322       (232)          90           17         34          51
                                                   ------------- ---------- ------------ ------------ ---------- -----------
      Total interest income                              11,282     (9,754)       1,528        6,823        135       6,958
                                                   ------------- ---------- ------------ ------------ ---------- -----------


Interest expense:
   Deposits
      NOW and money market deposits                         618     (1,822)      (1,204)       1,151        630       1,781
      Savings deposits                                      (25)      (328)        (353)        (202)       (77)       (279)
      Time deposits over $100,000                         2,346     (1,763)         583          431        772       1,203
      Other time deposits                                 2,224     (2,014)         210        1,383        851       2,234
   Borrowed funds                                         1,565       (862)         703          725         (6)        719
   Subordinated Debentures                                    -       (275)        (275)         202         22         224
                                                   ------------- ---------- ------------ ------------ ---------- -----------
      Total interest expense                              6,728     (7,064)        (336)       3,690      2,192       5,882
                                                   ------------- ---------- ------------ ------------ ---------- -----------

Net interest income increase (decrease)            $      4,554  $  (2,690) $     1,864  $     3,133  $  (2,057) $    1,076
                                                   ============= ========== ============ ============ ========== ===========
</TABLE>

Market Risk

         Like most financial institutions, our most significant market risk
exposure is the risk of economic loss resulting from adverse changes in market
price and interest rates. This risk of loss can be reflected in diminished
current market values and/or reduced potential net interest income in future
periods. Our market risk arises primarily from interest rate risk inherent in
our lending and deposit-taking activities. The structure of our loan and deposit
portfolios is such that a significant decline in interest rates may adversely
impact net market values and net interest income. We do not maintain a trading
account nor are we subject to currency exchange risk or commodity price risk.
Interest rate risk is monitored as part of the bank's asset/liability management
function. The following table presents information about the contractual
maturities, average interest rates and estimated fair values of our financial
instruments we considered market risk sensitive as of December 31, 2008. Loans
include nonaccrual loans but not the allowance for loan losses. (dollars in
thousands).

                                       - 33 -
<PAGE>

<TABLE>
<CAPTION>
                                                                                                     Average
                                                                                 Beyond              Interest  Estimated
                                   2009      2010     2011     2012     2013   Five Years   Total      Rate    Fair Value
                                 --------- -------- -------- -------- -------- ---------- --------- ---------- ----------
Financial Assets
  Loans:
         <S>                        <C>       <C>      <C>      <C>      <C>       <C>       <C>         <C>       <C>
     Fixed rate                  $ 102,064 $ 56,278 $ 79,954 $ 56,470 $ 86,336  $  30,260 $ 411,362      6.90% $  412,167
     Variable Rate                 186,287 $ 24,628 $ 10,590 $  6,155 $  8,643  $  33,835   270,138      4.80%    270,666
  Securities available for sale          -      280      519        -    1,886    169,306   171,991      4.97%    171,991
  Other earning assets               9,303        -        -        -        -          -     9,303      3.73%      9,303
                                 --------- -------- -------- -------- -------- ---------- --------- ---------- ----------
  Total                          $ 297,654 $ 81,186 $ 91,063 $ 62,625 $ 96,865  $ 233,401 $ 862,794      5.82% $  864,127
                                 ========= ======== ======== ======== ======== ========== =========            ==========


Financial Liabilities
  Money market, NOW and savings
   deposits                      $ 184,148        -        -        -        -          - $ 184,148      1.08% $  213,557
  Time deposits                    413,456   42,300    3,498    3,445    1,775        100   464,574      3.85%    434,034
  Borrowings                         1,500        -      814        -        -    112,000   114,314      4.07%    117,042
  Subordinated debentures                -        -   12,372        -        -          -    12,372      4.65%     11,773
                                 --------- -------- -------- -------- -------- ---------- --------- ---------- ----------
  Total                          $ 599,104 $ 42,300 $ 16,684 $  3,445 $  1,775  $ 112,100 $ 775,408      3.24% $  776,406
                                 ========= ======== ======== ======== ======== ========== =========            ==========
</TABLE>


Derivative Financial Instruments

          A derivative is a financial instrument that derives its cash flows,
and therefore its value, by reference to an underlying instrument, index, or
reference rate. These instruments primarily consist of interest rate swaps,
caps, floors, financial forward and futures contracts and options written or
purchased. Derivative contracts are written in amounts referred to as notional
amounts. Notional amounts only provide the basis for calculating payments
between counterparties and do not represent amounts to be exchanged between
parties and are not a measure of financial risk. Credit risk arises when amounts
receivable from a counterparty exceed amounts payable. We control our risk of
loss on derivative contracts by subjecting counterparties to credit reviews and
approvals similar to those used in making loans and other extensions of credit.

          We have used interest rate swaps in the management of interest rate
risk. Interest rate swaps are contractual agreements between two parties to
exchange a series of cash flows representing interest payments. A swap allows
both parties to alter the repricing characteristics of assets or liabilities
without affecting the underlying principal positions. Through the use of a swap,
assets and liabilities may be transformed from fixed to floating rates, from
floating rates to fixed rates, or from one type of floating rate to another. At
December 31, 2008, there were no derivative financial instruments outstanding.

          Although off-balance sheet derivative financial instruments do not
expose us to credit risk equal to the notional amount, such agreements generate
credit risk to the extent of the fair value gain in an off-balance sheet
derivative financial instrument if the counterparty fails to perform. We
minimize such risk by evaluating the creditworthiness of the counterparties and
consistently monitoring these agreements. The counterparties to these
arrangements are primarily large commercial banks and investment banks. Where
appropriate, master netting agreements are arranged or collateral is obtained in
the form of rights to securities.

         Other risks associated with interest-sensitive derivatives include the
effect on fixed rate positions during periods of changing interest rates.
Indexed amortizing swaps' notional amounts and maturities change based on
certain interest rate indices. Generally, as rates fall the notional amounts
decline more rapidly, and as rates increase notional amounts decline more
slowly. As of December 31, 2008, we had no indexed amortizing swaps outstanding.
Under unusual circumstances, financial derivatives also increase liquidity risk,
which could result from an environment of rising interest rates in which
derivatives produce negative cash flows while being offset by increased cash
flows from variable rate loans. We consider such risk to be insignificant due to
the relatively small derivative positions we hold.

         A discussion of derivatives is presented in Note K to our consolidated
financial statements, which are presented under Item 8 of Part II in this Form
10-K.

                                       - 34 -
<PAGE>

Quarterly Financial Information

         The following table sets forth, for the periods indicated, certain of
our consolidated quarterly financial information. This information is derived
from our unaudited financial statements, which include, in the opinion of
management, all normal recurring adjustments that management considers necessary
for a fair presentation of the results for such periods. This information should
be read in conjunction with our consolidated financial statements included under
Item 8 of Part II in this Form 10-K. The results for any quarter are not
necessarily indicative of results for any future period. (dollars in thousands,
except per share data).

<TABLE>
<CAPTION>
                                                    Year Ended December 31, 2008             Year Ended December 31, 2007
                                               ---------------------------------------  --------------------------------------
                                                 Fourth     Third    Second    First      Fourth    Third    Second    First
                                                 Quarter   Quarter  Quarter   Quarter    Quarter   Quarter  Quarter   Quarter
                                               ----------- -------- -------- ---------  ---------- -------- -------- ---------
Operating Data:
          <S>                                     <C>         <C>      <C>       <C>          <C>        <C>      <C>      <C>
  Total interest income                        $   12,274  $ 12,397 $ 12,240 $  12,131  $   12,480 $ 12,310 $ 11,594 $  11,128
  Total interest expense                            5,804     5,641    5,953     5,965       6,203    6,134    5,891     5,471
                                               ----------- -------- -------- ---------  ---------- -------- -------- ---------
    Net interest income                             6,469     6,756    6,287     6,166       6,277    6,176    5,703     5,657
  Provision for loan losses                         1,747       347      954       288         587      280      232       262
                                               ----------- -------- -------- ---------  ---------- -------- -------- ---------

    Net interest income after provision             4,722     6,409    5,332     5,878       5,690    5,896    5,471     5,395
  Noninterest income                                1,339     1,313    1,489     1,389       1,037    1,218      750     1,067
  Noninterest expense                               5,844     5,626    5,556     4,966       4,510    4,306    4,607     4,262
                                               ----------- -------- -------- ---------  ---------- -------- -------- ---------
    Income before income taxes                        217     2,097    1,265     2,301       2,218    2,808    1,614     2,200
  Provision for income taxes                         (129)      672      302       804         876      996      565       750
                                               ----------- -------- -------- ---------  ---------- -------- -------- ---------
    Net income                                 $      346  $  1,425 $    964 $   1,497  $    1,341 $  1,812 $  1,050 $   1,450
                                               =========== ======== ======== =========  ========== ======== ======== =========

Per Share Data:
 Net income:
  Basic                                        $     0.05  $   0.21 $   0.15 $    0.24  $     0.22 $   0.27 $   0.17 $    0.24
  Diluted                                            0.05      0.21     0.15      0.24        0.22     0.27     0.17      0.24

 Cash dividends declared                            0.085      0.08     0.08      0.08        0.08     0.08     0.07      0.06
</TABLE>


Investment Portfolio

         The valuations of investment securities at December 31, 2008, 2007 and
2006, respectively, were as follows (in thousands):

<TABLE>
<CAPTION>
<S>                     <C>          <C>          <C>          <C>          <C>          <C>
                                                      Available for Sale
                         ----------------------------------------------------------------------------
                                   2008                      2007                      2006
                         ------------------------  ------------------------  ------------------------
                          Amortized    Estimated    Amortized    Estimated    Amortized    Estimated
                             cost      fair value      cost      fair value      cost      fair value
                         -----------  -----------  -----------  -----------  -----------  -----------
U.S. Government and
 agency securities       $   65,590   $   65,748   $   92,651   $   93,208   $   85,730   $   85,247
State and municipal
 securities                  46,852       46,975        6,136        6,148        4,623        4,609
Mortgage-backed
 securities                  53,899       55,013       12,985       13,087        9,882        9,860
Other                         4,982        4,255        1,789        1,858        1,441        1,677
                         ----------   -----------  -----------  -----------  -----------  -----------
Total securities         $  171,323   $  171,991   $  113,561   $  114,301   $  101,676   $  101,393
                         ==========   ===========  ===========  ===========  ===========  ===========

Pledged securities                    $  120,880                $   98,540                $   69,239
                                      ===========               ===========               ===========
</TABLE>

                                       - 35 -
<PAGE>

         The following table sets forth the carrying value of our available for
sale investment portfolio at December 31, 2008 (in thousands):

<TABLE>
<CAPTION>
                                              Carrying Value
                         ---------------------------------------------------------
                                     After 1     After 5
                                       year        years
                                     through 5  through 10   After 10
                           1 year      years      years        years       Total
                         ---------- ----------- ----------  ----------  ----------
        <S>                  <C>        <C>        <C>         <C>         <C>
U.S. Government and
 agency securities                - $         - $   47,745  $   18,003  $   65,748
State and municipal
 securities                       -       2,729      5,281      38,965      46,975
Mortgage-backed
 securities                       -           -          -      55,013      55,013
Other                             -           -          -       4,255       4,255
                         ---------- ----------- ----------  ----------  ----------
Total                    $        - $     2,729 $   53,026  $  116,235  $  171,991
                         ========== =========== ==========  ==========  ==========
</TABLE>


         The following table sets forth the weighted average yield by maturity
of our available for sale investment portfolio at December 31, 2008 amortized
cost:

<TABLE>
<CAPTION>
                                            Weighted Average Yields
                         -------------------------------------------------------------
                                      After 1      After 5
                                       year         years
                                     through 5   through 10     After 10
                           1 year     years        years         years         Total
                         ---------- ------------ -----------  -----------  -----------
        <S>                 <C>         <C>         <C>          <C>          <C>
U.S. Government and
 agency securities                -           -        5.49%        5.34%        5.45%
State and municipal
 securities                       -        5.43%       4.98%        4.30%        4.45%
Mortgage-backed
 securities                       -           -           -         5.69%        5.69%
Other                             -           -           -         2.80%        2.80%
                         ---------- ------------ -----------  -----------  -----------
Total weighted average
 yields                           -        5.43%       5.44%        4.77%        4.97%
                         ========== ============ ===========  ===========  ===========
</TABLE>

                                       - 36 -
<PAGE>

Loan Portfolio

         Loans consisted of the following, as extracted from the Call Reports of
December 31, 2008, 2007, 2006, 2005 and 2004 (in thousands):

<TABLE>
<CAPTION>
                       <S>                                                 <C>         <C>         <C>         <C>         <C>
                                                                          2008        2007        2006        2005        2004
                                                                       ----------- ----------- ----------- ----------- -----------
Loans receivable:

  Loans secured by real estate:
    Construction and land development                                  $  274,687  $  252,449  $  194,460  $  142,592  $   90,742
    Secured by farmland                                                    15,683      12,700      12,326      11,650      15,203
    Secured by 1-4 family residential properties:
      Revolving open-end loans & lines of credit                           37,078      24,579      22,868      23,581      23,295
      All other                                                           114,619      76,776      68,196      66,140      58,158
    Secured by multifamily residential properties                           8,033       5,123       3,913       4,085       5,088
    Secured by nonfarm nonresidential properties                          151,043     110,769     102,217      84,189      72,611

  Loans to finance agricultural production and other loans
    to farmers                                                              3,060       3,119       2,724       3,729       4,020
  Commercial and industrial loans                                          51,663      45,653      37,622      34,166      26,005


  Loans to individuals for household, family and other
  personal expenditures
    Credit cards and related plans                                          4,689       4,331       4,778       3,933       3,807
    Other                                                                  10,804       8,235      11,840      22,438      13,400

  Obligations of states and political subdivisions in the U.S.:
    Tax exempt obligations                                                  7,130         744         199         113         225
  All other loans                                                           3,195       1,030         897         787         628
  Lease financing receivables                                                   4           5           5           9          12
  Deferred cost (unearned income) and fees                                   (189)       (243)       (283)       (318)       (379)
                                                                       ----------- ----------- ----------- ----------- -----------
     Total loans                                                          681,500     545,270     461,763     397,094     312,815
  Allowance for loan losses                                                (9,542)     (6,653)     (5,566)     (4,965)     (4,055)
                                                                       ----------- ----------- ----------- ----------- -----------
      Net loans                                                        $  671,958  $  538,617  $  456,197  $  392,129  $  308,760
                                                                       =========== =========== =========== =========== ===========
  Commitments and contingencies:
  Commitments to make loans                                               119,958     141,511     140,539      97,183      89,377

  Standby letters of credit                                                 2,940       2,611       4,711       4,796       1,726
</TABLE>

                                       - 37 -
<PAGE>

Certain Loan Maturities

         The maturities and carrying amounts of certain loans as of
December 31, 2008 are summarized as follows (in thousands):

                                                    Real Estate
                                       Commerical  Construction
                                     Financial and   and Land
                                     Agricultural   Development       Total
                                    -------------- -------------  --------------

Due within one year                 $       62,897 $     183,029  $     245,926

Due after one year through five
 years:
    Fixed rate                             120,487        73,093        193,580
    Variable rate                           23,344        16,303         39,647

Due after five years:
    Fixed rate                              10,520         2,574         13,094
    Variable rate                            6,035           183          6,218
                                    -------------- -------------  -------------

Total                               $      223,283 $     275,182  $     498,465
                                    ============== =============  =============

Risk Elements

         Past due and nonaccrual loans, as extracted from the Call Reports of
December 31, 2008, 2007, 2006, 2005, and 2004 were as follows (in thousands):

<TABLE>
<CAPTION>
                                                          2008      2007        2006       2005       2004
                                                      --------- --------- ---------- ---------- ----------
Nonaccrual loans:
             <S>                                         <C>        <C>         <C>        <C>        <C>
    Real estate loans                                   $20,164    $1,038      $ 859      $ 535      $ 614
    Installment loans                                        33        40         58        114         80
    Commercial and all other loans                          607       176         50        348        250
                                                      --------- --------- ---------- ---------- ----------

       Total                                            $20,804    $1,254      $ 967      $ 997      $ 944
                                                      ========= ========= ========== =====================

Agricultural loans included above                       $   167    $  164      $   -      $ 252      $ 197
                                                      ========= ========= ========== ========== ==========

Past due 90 days or more and still accruing:
    Real estate loans                                   $   968    $   30      $  33      $  64      $ 188
    Installment loans                                         -         -          -          -          1
    Credit cards and related plans                           60        22          -         10         11
    Commercial and all other loans                           18         -          -          -         26
                                                      --------- --------- ---------- ---------- ----------

       Total                                            $ 1,046    $   52      $  33      $  74      $ 226
                                                      ========= ========= ========== ========== ==========

Agricultural loans included above                       $     -    $    -      $   -      $   -      $  26
                                                      ========= ========= ========== ========== ==========
</TABLE>


Loans,  including impaired loans, are generally classified as nonaccrual if they
are past due as to maturity or payment of  principal or interest for a period of
more than 90 days,  unless  such loans are  well-secured  and in the  process of
collection.  The gross  interest  income that would have been recorded for loans
accounted  for on a  nonaccrual  basis at December  31,  2008 was  approximately
$646,000.  This amount represents  interest income that would have been recorded
if the loans had been current in accordance  with their  original  terms and had
been outstanding throughout the period or since origination, if held for part of
the period.

                                       - 38 -
<PAGE>

         Foreclosed assets (included in other assets) were $1.2 million, $1.7
million, $327,000, $247,000, and $404,000, at December 31, 2008, 2007, 2006,
2005, and 2004, respectively. The amount of interest recognized on impaired
loans during the portion of 2008 that they were impaired was not material.

Allowance for Loan Losses and Summary of Loan Loss Experience

         As a matter of policy, the bank maintains an allowance for loan losses.
The allowance for loan losses is created by direct charges to income and by
recoveries of amounts previously charged off. The allowance is reduced as losses
on loans are charged against the allowance when realized.

         We evaluate our loan portfolio in accordance with SFAS No. 114,
Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118,
Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosure. Under these standards, a loan is considered impaired, based on
current information and events, if it is probable that the company will be
unable to collect the scheduled payments of principal and interest when due
according to the contractual terms of the loan agreement. Uncollateralized loans
are measured for impairment based on the present value of expected future cash
flows discounted at the historical effective interest rate or the loan's
observable market price, while all collateral-dependent loans are measured for
impairment based on the fair value of the collateral. If the recorded investment
in the loan exceeds the measure of fair value, a valuation allowance is
established as a component of the allowance for loan losses. This evaluation is
inherently subjective, as it requires material estimates that may be susceptible
to significant change.

         The loan portfolio and the adequacy of the allowance are evaluated by
management at least quarterly. In addition, our Loan Committee reviews our loan
portfolio and credit quality quarterly. The amount of the allowance is based on
management's evaluation of the loan portfolio including trends in composition,
growth, and terms, historical and expected loan loss experience, economic
conditions and conditions that may affect the borrowers' ability to pay, and
other factors management deems appropriate. In addition, regulatory examiners
may require the bank to recognize changes to the allowance for loan losses based
on their judgments about information available to them at the time of their
examination. The bank's management believes its allowance for loan losses is
adequate under existing economic conditions to absorb loan losses inherent in
its loan portfolio. Although management attempts to maintain the allowance at a
level deemed adequate, future additions to the allowance may be necessary based
upon changes in market conditions or the status of the loans included in the
loan portfolio.

         The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings. Loans are
charged against the allowance for loan losses when management believes that the
uncollectibility of a loan balance is confirmed. In addition to the review of
loans considered impaired as discussed above, the allowance for loan losses is
also based upon such factors as changes in the trends in volumes and terms of
loans, levels and trends of charge-offs and recoveries, national and local
economic trends and conditions that may affect the borrowers' ability to pay,
effects of changes in risk selection and underwriting standards as well as
overall portfolio quality. If conditions change substantially from the
assumptions used to evaluate the allowance for loan losses, it is possible that
management's assessment of the allowance may change.

                                       - 39 -
<PAGE>

         The following table summarizes the bank's loan loss experience for the
years ending December 31, 2008, 2007, 2006, 2005, and 2004 (in thousands, except
ratios):

<TABLE>
<CAPTION>
                                             2008         2007         2006         2005         2004
                                         ------------ ------------ ------------ ------------ ------------

             <S>                             <C>          <C>          <C>          <C>          <C>
Balance at beginning of period           $     6,653  $     5,566  $     4,965  $     4,055  $     3,430

Charge-offs:
    Commercial and other                         260          104          135          245          417
    Real estate                                1,267          144           87          158          395
    Installment loans to individuals             309          217          178          198          237
    Credit cards and related plans               159           39           58           95          297
                                         ------------ ------------ ------------ ------------ ------------
                                               1,995          504          458          696        1,346
                                         ------------ ------------ ------------ ------------ ------------
Recoveries:
    Commercial and other                          51           26           49           49          206
    Real estate                                   19           71           32           19           27
    Installment loans                             78           88           65           69           56
    Credit cards and related plans                10           44           40           66           86
                                         ------------ ------------ ------------ ------------ ------------
                                                 158          229          186          203          375
                                         ------------ ------------ ------------ ------------ ------------

Net charge-offs                                1,837          275          272          493          971
                                         ------------ ------------ ------------ ------------ ------------

Additions charged to operations                3,336        1,362          873        1,403        1,596
                                         ------------ ------------ ------------ ------------ ------------

Adjustments due to Merger with Longleaf
 Community Bank                                1,390            -            -            -            -
                                         ------------ ------------ ------------ ------------ ------------

Balance at end of year                   $     9,542  $     6,653  $     5,566  $     4,965  $     4,055
                                         ============ ============ ============ ============ ============

Ratio of net charge-offs during the year
 to average gross loans outstanding
 during the year                                0.29%        0.06%        0.06%        0.14%        0.32%
</TABLE>

         The following table summarizes the bank's allocation of allowance for
loan losses at December 31, 2008, 2007, 2006, 2005 and 2004 (in thousands,
except ratios):

<TABLE>
<CAPTION>
                                                    At December 31,
                              -----------------------------------------------------------
                                      2008                2007               2006
                              --------------------- ------------------ ------------------
                                        % of Total          % of Total         % of Total
                               Amount   Loans (1)   Amount  Loans (1)  Amount  Loans (1)
                              --------- ----------- ------- ---------- ------- ----------
       <S>                       <C>        <C>       <C>      <C>       <C>      <C>
Real estate loans             $   8,414         88% $ 5,883        88% $ 4,866        87%
Commercial and industrial
 loans                              766          8%     595         9%     486         9%
Installment loans                   217          2%     153         2%     200         4%
Unallocated                         145          2%      22         -       14         -
                              --------- ----------- ------- ---------- ------- ----------

Total                         $   9,542        100% $ 6,653       100% $ 5,566       100%
                              ========= =========== ======= ========== ======= ==========
</TABLE>

                                       - 40 -
<PAGE>

<TABLE>
<CAPTION>
                                                 At December 31,
                                    -----------------------------------------
                                           2005                 2004
                                    -------------------- --------------------
                                              % of Total          % of Total
                                     Amount   Loans (1)   Amount  Loans (1)
                                    --------- ---------- -------- -----------
         <S>                           <C>        <C>      <C>        <C>
Real estate loans                   $   4,150        84% $  3,432         85%
Commercial and industrial
 loans                                    474        10%      389         10%
Installment loans                         330         7%      223          6%
Unallocated                                11         0%       11          0%
                                    --------- ---------- -------- -----------

    Total                           $   4,965       100% $  4,055        100%
                                    ========= ========== ======== ===========

------------------------------------
(1) Represents total of all outstanding loans in each category as a percentage of total loans outstanding.
</TABLE>

Deposits

         Time certificates in amounts of $100,000 or more outstanding at
December 31, 2008 by maturity were as follows (in thousands):

Three months or less                         $              126,259
Over three months through six months                         73,743
Over six months through twelve months                        54,065
Over twelve months through three years                       21,645
Over three years                                              2,823
                                            -----------------------

Total                                        $              278,535
                                            =======================

Borrowings

         The bank borrows funds principally from the FHLB.  Information
regarding such borrowings is as follows (in thousands, except
rates):

                                            2008        2007         2006
                                        ------------ ----------- -------------

Balance outstanding at December 31      $   114,314  $   97,000  $     70,000
Weighted average rate at December 31           3.60%       4.44%         4.65%
Maximum borrowings during the year      $   147,994  $   97,000  $     70,000
Average amounts outstanding during year $   108,321  $   78,405  $     62,103
Weighted average rate during year              4.07%       4.73%         4.65%

         There were no short-term advances outstanding from the FHLB at December
31, 2008 and 2007. For 2008 and 2007, average outstanding short-term balances
were $1,144,000 and $973,000, respectively.

         In addition, the bank may purchase federal funds through unsecured
federal funds lines of credit with various banks aggregating $38.2 million.
These lines are intended for short-term borrowings and are payable on demand and
bear interest based upon the daily federal funds rate. For 2008 and 2007,
average federal funds purchased were $6.9 million and $3.6 million,
respectively. At December 31, 2008 the bank had no federal funds borrowings
outstanding under these lines. At December 31, 2007, there were $10.0 million
federal funds borrowings outstanding.

         The Company completed a $12 million offering of Trust Preferred
Securities on March 30, 2006. Net proceeds from the sale of the Trust Preferred
Securities were invested in Junior Subordinated Deferrable Interest Debentures
issued by the Company.

                                       - 41 -
<PAGE>

Critical Accounting Estimates and Policies

         We prepare our consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires us to make estimates and
assumptions that 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 amount of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

         Critical accounting estimates and policies are those we believe are
both most important to the portrayal of our financial condition and results, and
require our most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain. Judgments and uncertainties affecting the application of those
policies may result in materially different amounts being reported under
different conditions or using different assumptions. We believe that the
allowance for loan losses represents a particularly sensitive accounting
estimate. The amount of the allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the maturity of the loan
portfolio, credit concentration, trends in historical loss experience, specific
impaired loans and general economic conditions. See Note A to the consolidated
financial statements for a comprehensive discussion of our accounting policy for
the allowance for loan losses.

         Additionally, we believe that intangible assets represent a sensitive
accounting estimate. Intangible assets include goodwill and other identifiable
assets, such as core deposit premiums, resulting from acquisitions. Core deposit
premiums are amortized primarily on a straight-line basis over a ten-year life
based upon historical studies of core deposits. Goodwill is not amortized but is
tested annually for impairment or at any time an event occurs or circumstances
change that may trigger a decline in the value of the reporting unit. Examples
of such events or circumstances include adverse changes in legal factors,
business climate, unanticipated competition, change in regulatory environment,
or loss of key personnel.

         The Company tests for impairment in accordance with SFAS No. 142.
Potential impairment of goodwill exists when the carrying amount of a reporting
unit exceeds its fair value. In testing for impairment, an estimate of the fair
value of the reporting unit under a business combination is done using one of
two approaches. The Comparable Transaction Approach utilizes a regional
transaction group and a national transaction group. For each group, average and
median pricing ratios were applied to provide a range of values along with
several qualitative factors being considered. The Discounted Cash Flow Approach
is derived from the present value of future dividends over a five year time
horizon and the projected terminal value at the end of the fifth year. The
goodwill that would arise from this estimate is compared to the carrying value
of the goodwill currently on the books to determine impairment.

         To the extent a reporting unit's carrying amount exceeds its fair
value, an indication exists that the reporting unit's goodwill may be impaired,
and a second step of impairment test will be performed. In the second step, the
implied fair value of the reporting unit's goodwill, determined by allocating
the reporting unit's fair value to all of its assets (recognized and
unrecognized) and liabilities as if the reporting unit had been acquired in a
business combination at the date of the impairment test. If the implied fair
value of reporting unit goodwill is lower than its carrying amount, goodwill is
impaired and is written down to its implied fair value. The loss recognized is
limited to the carrying amount of goodwill. Once an impairment loss is
recognized, future increases in fair value will not result in the reversal of
previously recognized losses.

New Accounting Standards

         SFAS No. 157, Fair Value Measurements, was issued in September 2006. In
defining fair value, SFAS No. 157 retains the exchange price notion in earlier
definitions of fair value. However, the definition of fair value under SFAS No.
157 focuses on the price that would be received to sell an asset or paid to
transfer a liability (an exit price), not the price that would be paid to
acquire the asset or received to assume the liability (an entry price). SFAS No.
157 applies whenever other accounting pronouncements require or permit assets or
liabilities to be measured at fair value. Accordingly, SFAS No. 157 does not
expand the use of fair value in any new circumstances. SFAS No. 157 also
establishes a fair value hierarchy that prioritizes the information used to
develop assumptions used to determine the exit price. Under this standard, fair
value measurements would be disclosed separately by level within the fair value
hierarchy. The Company adopted SFAS No. 157 effective January 1, 2008. The
adoption of SFAS No. 157 had no effect on the Company's financial condition or
results of operations. For additional information on the fair value of certain
financial assets and liabilities, see Note M to the consolidated financial
statements.

                                       - 42 -
<PAGE>

         In February 2007, the FASB issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities. SFAS No. 159 creates a fair
value option allowing an entity irrevocably to elect fair value as the initial
and subsequent measurement attribute for certain financial assets and financial
liabilities, with changes in fair value recognized in earnings as they occur.
SFAS No. 159 requires an entity to report those financial assets and financial
liabilities measured at fair value in a manner that separates those reported
fair values from the carrying amounts of assets and liabilities measured using
another measurement attribute on the face of the statement of financial
position. SFAS No. 159 also requires an entity to provide information that would
allow users to understand the effect on earnings of changes in the fair value on
those instruments selected for the fair value election. The Company adopted SFAS
No. 159 effective January 1, 2008. There was no initial effect of adoption since
the Company did not elect the fair value option for any existing asset or
liability. In addition, the Company did not elect the fair value option for any
financial assets originated or purchased, or for liabilities issued, through
December 31, 2008.

         In December 2007, the FASB issued SFAS No. 141(revised 2007), Business
Combinations ("SFAS No. 141(R)"), which replaces SFAS No. 141. SFAS No. 141(R)
establishes principles and requirements for recognition and measurement of
assets, liabilities and any noncontrolling interest acquired due to a business
combination. SFAS No. 141(R) expands the definitions of a business and a
business combination, resulting in an increased number of transactions or other
events that will qualify as business combinations. Under SFAS No. 141(R) the
entity that acquires the business (the "acquirer") will record 100 percent of
all assets and liabilities of the acquired business, including goodwill,
generally at their fair values. As such, an acquirer will not be permitted to
recognize the allowance for loan losses of the acquiree. SFAS No. 141(R)
requires the acquirer to recognize goodwill as of the acquisition date, measured
as a residual. In most business combinations, goodwill will be recognized to the
extent that the consideration transferred plus the fair value of any
noncontrolling interests in the acquiree at the acquisition date exceeds the
fair value of the identifiable net assets acquired. Under SFAS No. 141(R),
acquisition-related transaction and restructuring costs will be expensed as
incurred rather than treated as part of the cost of the acquisition and included
in the amount recorded for assets acquired. SFAS No. 141(R) is effective for
fiscal years beginning after December 15, 2008. Accordingly, for acquisitions
completed after December 31, 2008, the Company will apply the provisions of SFAS
No. 141(R).

         In December 2007, the FASB issued SFAS No. 160, Noncontrolling
Interests in Consolidated Financial Statements, an amendment of ARB 51, which
defines noncontrolling interest as the portion of equity in a subsidiary not
attributable, directly or indirectly, to the parent. SFAS No. 160 requires the
ownership interests in subsidiaries held by parties other than the parent
(previously referred to as minority interest) to be clearly presented in the
consolidated statement of financial position within equity, but separate from
the parent's equity. The amount of consolidated net income attributable to the
parent and to any noncontrolling interest must be clearly presented on the face
of the consolidated statement of income. Changes in the parent's ownership
interest while the parent retains its controlling financial interest (greater
than 50 percent ownership) are to be accounted for as equity transactions. Upon
a loss of control, any gain or loss on the interest sold will be recognized in
earnings. Additionally, any ownership interest retained will be remeasured at
fair value on the date control is lost, with any gain or loss recognized in
earnings. SFAS No. 160 is effective for fiscal years beginning after December
15, 2008. Accordingly, the Company will adopt the provisions of SFAS No. 160 in
the first quarter 2009. The Company does not expect the adoption of the
provisions of SFAS No. 160 to have a material effect on its financial condition
and results of operations.

         SFAS No. 161, Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133, issued in March 2008,
requires enhanced disclosures about an entity's derivative and hedging
activities. These enhanced disclosures will discuss (a) how and why an entity
uses derivative instruments; (b) how derivative instruments and related hedged
items are accounted for under SFAS No. 133, and its related interpretations; and
(c) how derivative instruments and related hedged items affect an entity's
financial position, financial performance, and cash flows. SFAS No. 161 is
effective for financial statements issued for fiscal years beginning after
November 15, 2008 with earlier adoption allowed. The Company does not believe
that the adoption of SFAS No. 161 will have a material effect on its financial
condition or results of operations.

         FSP No. FAS 157-3, Determining the Fair Value of a Financial Asset When
the Market for That Asset Is Not Active ("FSP FAS 157-3"), issued in October
2008, clarifies the application of SFAS No. 157 in a market that is not active
and provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not
active. FSP FAS 157-3 was effective upon issuance, including prior periods for
which financial statements have not been issued. Revisions resulting from a
change in the valuation technique or its application should be accounted for as
a change in accounting estimate following the guidance in SFAS No. 154,
Accounting Changes and Error Corrections. However, the disclosure provisions in
SFAS No. 154 for a change in accounting estimate are not required for revisions
resulting from a change in valuation technique or its application. As FSP FAS
157-3 clarified but did not change the application of SFAS No. 157, the adoption
of FSP FAS 157-3 had no effect on the Company's financial condition or results
of operations.

                                       - 43 -
<PAGE>

         Other accounting standards that have been issued or proposed by the
FASB or other standards-setting bodies are not expected to have a material
impact on the Company's financial position, results of operations and cash
flows.

         From time to time the FASB issues exposure drafts for proposed
statements of financial accounting standards. Such exposure drafts are subject
to comment from the public, to revisions by the FASB and to final issuance by
the FASB as statements of financial accounting standards. Management considers
the effect of the proposed statements on the consolidated financial statements
of the Company and monitors the status of changes to and proposed effective
dates of exposure drafts.

Item 7A - Quantitative and Qualitative Disclosures About Market Risk.

         This information is included under Item 7 of this report under the
captions "Interest Rate Sensitivity Analysis," "Market Risk," and "Derivative
Financial Instruments."

Item 8 - Financial Statements and Supplementary Data.

                                       - 44 -
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors and Shareholders
Four Oaks Fincorp, Inc.
Four Oaks, North Carolina


We have audited the accompanying consolidated balance sheets of Four Oaks
Fincorp, Inc. and Subsidiaries as of December 31, 2008 and 2007 and the related
consolidated statements of operations, comprehensive income, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 2008. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Four Oaks Fincorp,
Inc. and Subsidiaries as of December 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2008 in conformity with accounting principles generally
accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness Four Oaks Fincorp,
Inc.'s internal control over financial reporting as of December 31, 2008, based
on criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission, and our report
dated March 12, 2009 expressed an unqualified opinion on the effectiveness of
the Company's internal control over financial reporting.


/s/ Dixon Hughes PLLC
---------------------
Raleigh, North Carolina
March 12, 2009


--------------------------------------------------------------------------------

                                       - 45 -
<PAGE>

<TABLE>
<CAPTION>
Four Oaks Fincorp, Inc.
Consolidated Balance Sheets
December 31, 2008 and 2007
----------------------------------------------------------------------------------------------------------------------------------


                                                                                     2008                          2007
                                                                        ------------------------------- --------------------------
                                                                                (Amounts in thousands, except share data)
ASSETS

<S>                                                                     <C>                             <C>
Cash and due from banks                                                 $                       19,449  $                  14,394
Interest-earning deposits                                                                        9,303                      3,881
Federal funds sold                                                                                 123                          -
Investment securities available for sale, at fair value                                        171,991                    114,301

Loans                                                                                          681,500                    545,270
Allowance for loan losses                                                                       (9,542)                    (6,653)
                                                                        ------------------------------- --------------------------
        Net loans                                                                              671,958                    538,617

Accrued interest receivable                                                                      4,216                      3,564
Bank premises and equipment, net                                                                17,156                     12,627
FHLB stock                                                                                       6,529                      5,010
Investment in life insurance                                                                    10,566                     10,041
Goodwill                                                                                         6,083                          -
Other assets                                                                                     7,409                      5,868
                                                                        ------------------------------- --------------------------

        Total assets                                                   $                      924,783  $                 708,303
                                                                        =============================== ==========================

LIABILITIES AND SHAREHOLDERS' EQUITY

Deposits:
   Noninterest-bearing demand                                           $                       73,971  $                  74,687
   Money market and NOW accounts                                                               155,737                    126,300
   Savings                                                                                      28,412                     28,041
   Time deposits, $100,000 and over                                                            278,535                    172,513
   Other time deposits                                                                         186,039                    136,222
                                                                        ------------------------------- --------------------------
        Total deposits                                                                         722,694                    537,763

Borrowings                                                                                     114,314                     97,000
Subordinated debentures                                                                         12,372                     12,372
Accrued interest payable                                                                         3,282                      4,055
Other liabilities                                                                                5,471                      2,483
                                                                        ------------------------------- --------------------------

        Total liabilities                                                                      858,133                    653,673
                                                                        ------------------------------- --------------------------

Commitments and Contingencies (Notes C, L, N, and P)

Shareholders' equity:
   Common stock, $ 1.00 par value, 20,000,000 shares authorized;
    6,921,909 and 6,165,197 shares issued and outstanding at December
    31, 2008 and 2007, respectively                                                              6,922                      6,165
   Additional paid-in capital                                                                   30,862                     21,545
   Retained earnings                                                                            28,456                     26,477
   Accumulated other comprehensive income                                                          410                        443
                                                                        ------------------------------- --------------------------
        Total shareholders' equity                                                              66,650                     54,630
                                                                        ------------------------------- --------------------------

        Total liabilities and shareholders' equity                      $                      924,783  $                 708,303
                                                                        =============================== ==========================



----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                       - 46 -
<PAGE>

<TABLE>
<CAPTION>
Four Oaks Fincorp, Inc.
Consolidated Statements of Operations
For the Years Ended December 31, 2008, 2007 and 2006
----------------------------------------------------------------------------------------------------------------------------------

                                                                                   2008              2007              2006
                                                                           ------------------- ----------------- -----------------
                                                                                (Amounts in thousands, except per share data)
<S>                                                                        <C>                 <C>               <C>
Interest and dividend income:
  Loans, including fees                                                    $            41,182 $         40,967  $         35,457
  Investment securities:
    Taxable                                                                              6,646            5,873             4,503
    Tax-exempt                                                                             627              178               152
  Dividends                                                                                505              390               287
  Interest-earning deposits                                                                 81              105               157
                                                                           ------------------- ----------------- -----------------
    Total interest and dividend income                                                  49,041           47,513            40,556
                                                                           ------------------- ----------------- -----------------

Interest expense:
  Deposits                                                                              18,379           19,142            14,202
  Borrowings                                                                             4,984            4,557             3,615
                                                                           ------------------- ----------------- -----------------
    Total interest expense                                                              23,363           23,699            17,817
                                                                           ------------------- ----------------- -----------------

    Net interest income                                                                 25,678           23,814            22,739

Provision for loan losses                                                                3,336            1,362               873
                                                                           ------------------- ----------------- -----------------
Net interest income after provision for loan losses                                     22,342           22,452            21,866
                                                                           ------------------- ----------------- -----------------

Non-interest income:
  Service charges on deposit accounts                                                    2,291            2,098             2,053
  Other service charges, commissions and fees                                            1,522            1,544             1,613
  Gains (losses) on sale of investment securities                                          576              (36)             (121)
  Gains (losses) on hedges, net                                                             97              165              (262)
  Gains on sale of loans                                                                    47               69               103
  Merchant fees                                                                            472              436               402
  Income (loss) from investment in life insurance                                          525             (205)              549
                                                                           ------------------- ----------------- -----------------
    Total non-interest income                                                            5,530            4,071             4,337
                                                                           ------------------- ----------------- -----------------

Non-interest expenses:
  Salaries                                                                              10,250            8,444             7,163
  Employee benefits                                                                      2,110            1,690             1,477
  Occupancy expenses                                                                     1,026              799               681
  Equipment expenses                                                                     1,543            1,409             1,438
  Professional and consulting fees                                                       1,617            1,263             1,183
  Other taxes and licenses                                                                 456              275               271
  Merchant processing expenses                                                             410              370               355
  Other operating expenses                                                               4,580            3,434             2,991
                                                                           ------------------- ----------------- -----------------
    Total non-interest expenses                                                         21,992           17,684            15,559
                                                                           ------------------- ----------------- -----------------

Income before income taxes                                                               5,880            8,839            10,644
Provision for income taxes                                                               1,649            3,187             3,627
                                                                           ------------------- ----------------- -----------------

    Net income                                                             $             4,231 $          5,652  $          7,017
                                                                           =================== ================= =================

Basic net income per common share                                          $              0.65 $           0.92  $           1.15
                                                                           =================== ================= =================

Diluted net income per common share                                        $              0.65 $           0.91  $           1.14
                                                                           =================== ================= =================



----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                       - 47 -
<PAGE>

<TABLE>
<CAPTION>
Four Oaks Fincorp, Inc.
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 2008, 2007 and 2006
----------------------------------------------------------------------------------------------------------------------------------


                                                                                   2008               2007               2006
                                                                            ------------------ ------------------- ---------------
                                                                                            (Amounts in thousands)

<S>                                                                         <C>                <C>                 <C>
Net income                                                                  $           4,231  $            5,652  $        7,017
                                                                            ------------------ ------------------- ---------------

Other comprehensive income (loss):
  Securities available for sale:
    Unrealized holding gains on available for sale securities                             504                 987             145
      Tax effect                                                                         (189)               (395)            (57)

    Reclassification of (gains) losses recognized in net income                          (576)                 36             121
      Tax effect                                                                          228                 (14)            (48)
                                                                            ------------------ ------------------- ---------------
    Net of tax amount                                                                     (33)                613             161
                                                                            ------------------ ------------------- ---------------

  Cash flow hedging activities:
    Unrealized holding gains on cash flow hedging activities                                -                 402             314
      Tax effect                                                                            -                (160)           (127)
                                                                            ------------------ ------------------- ---------------
    Net of tax amount                                                                       -                 242             187
                                                                            ------------------ ------------------- ---------------

    Total other comprehensive income (loss)                                               (33)                855             348
                                                                            ------------------ ------------------- ---------------

Comprehensive income                                                        $           4,198  $            6,507  $        7,365
                                                                            ================== =================== ===============



----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                       - 48 -
<PAGE>

<TABLE>
<CAPTION>
Four Oaks Fincorp, Inc.
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 2008, 2007 and 2006
----------------------------------------------------------------------------------------------------------------------------------

                                                                                           Accumulated
                                               Common stock        Additional                 other             Total
                                          -----------------------   paid-in     Retained  comprehensive      shareholders'
                                             Shares      Amount     capital     earnings  income (loss)         equity
                                          ------------  --------- ------------ ---------- --------------    ---------------
                                                              (Amounts in thousands, except share data)

              <S>                            <C>           <C>         <C>         <C>          <C>                <C>
BALANCE, DECEMBER 31, 2005                  4,379,258     $4,379     $  9,178  $  28,815         $ (760)          $ 41,612
  Net income                                        -          -            -      7,017              -              7,017
  Other comprehensive income                        -          -            -          -            348                348
  Effect of 5-for-4 stock split             1,109,543      1,110       (1,110)         -              -                  -
  Issuance of common stock                     98,896         98        1,511          -              -              1,609
    Current income tax benefit                      -          -          293          -              -                293
  Stock based compensation                          -          -          144          -              -                144
  Purchases and retirement of common
   stock                                       (9,835)        (9)           -       (243)             -               (252)
  Cash dividends of $.24 per share                  -          -            -     (1,448)             -             (1,448)
                                          ------------  --------- ------------ ---------- --------------    ---------------

BALANCE, DECEMBER 31, 2006                  5,577,862     $5,578     $ 10,016  $  34,141         $ (412)          $ 49,323
  Net income                                        -          -            -      5,652              -              5,652
  Other comprehensive income                        -          -            -          -            855                855
  Effect of 10% stock dividend                562,345        562        9,532    (10,094)             -                  -
  Issuance of common stock                    100,797        100        1,565          -              -              1,665
    Current income tax benefit                      -          -          203          -              -                203
  Stock based compensation                          -          -          229          -              -                229
  Purchases and retirement of common
   stock                                      (75,807)       (75)           -     (1,437)             -             (1,513)
  Cash dividends of $.29 per share                  -          -            -     (1,784)             -             (1,784)
                                          ------------  --------- ------------ ---------- --------------    ---------------

BALANCE, DECEMBER 31, 2007                  6,165,197     $6,165     $ 21,545  $  26,477         $  443           $ 54,630
  Net income                                        -          -            -      4,231              -              4,231
  Other comprehensive income (loss)                 -          -            -          -            (33)               (33)
  Effect of merger with LongLeaf
   Community Bank                             609,770        610        7,335          -              -              7,945
  Issuance of common stock                    152,962        153        1,706          -              -              1,859
    Current income tax benefit                      -          -          102          -              -                102
  Stock based compensation                          -          -          174          -              -                174
  Purchases and retirement of common
   stock                                       (6,020)        (6)           -        (69)             -                (75)
  Cash dividends of $ .325 per share YTD            -          -            -     (2,183)             -             (2,183)
                                          ------------  --------- ------------ ---------- --------------    ---------------

BALANCE AT DECEMBER 31, 2008                6,921,909     $6,922     $ 30,862  $  28,456         $  410           $ 66,650
                                          ============  ========= ============ ========== ==============    ===============




----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                       - 49 -
<PAGE>

<TABLE>
<CAPTION>
Four Oaks Fincorp, Inc.
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2008, 2007 and 2006
----------------------------------------------------------------------------------------------------------------------------------

                                                                       2008                2007                2006
                                                                 ----------------- -------------------- -------------------
                                                                                   (Amounts in thousands)
Cash flows from operating activities:
                          <S>                                          <C>                 <C>                   <C>
  Net income                                                     $          4,231  $             5,652  $            7,017
  Adjustments to reconcile net income to net cash provided by
   operations:
      Provision for loan losses                                             3,336                1,362                 873
      Provision for depreciation and amortization                           1,116                1,009               1,022
      Deferred income tax benefit                                               -                 (523)               (319)
      Net amortization of bond premiums and discounts                          19                   32                 (28)
      Stock based compensation                                                174                  229                 144
      Gain on sale of loans                                                   (47)                 (69)               (103)
      (Gain) loss on sale of investment securities                           (576)                  36                 121
      (Gain) loss on sale of foreclosed assets                                197                   20                  (2)
      Loss on disposition of premises and equipment                             4                   77                  73
      (Income) loss from investment in life insurance                        (525)                 205                (549)
      Changes in hedge activity                                               (97)                (165)                262
      Changes in assets and liabilities:
        Other assets                                                         (578)                 407              (1,365)
        Interest receivable                                                  (410)                  50                (664)
        Other liabilities                                                   1,830                  134              (3,556)
        Interest payable                                                     (878)                 797               1,003
                                                                 ----------------- -------------------- -------------------
          Net cash provided by operating activities                         7,796                9,253               3,929
                                                                 ----------------- -------------------- -------------------

Cash flows from investing activities:
  Proceeds from sales and calls of investment securities
   available for sale                                                     152,498               78,027              36,759
  Proceeds from maturities of investment securities available
   for sale                                                                     -                2,000                 275
  Purchase of investment securities available for sale                   (205,491)             (91,980)            (58,045)
  Purchase of FHLB stock                                                   (3,802)              (1,320)             (1,825)
  Redemption of FHLB stock                                                  2,562                  504               1,286
  Net increase in loans                                                   (89,655)             (86,283)            (65,107)
  Purchases of bank premises and equipment                                 (1,999)              (2,070)             (3,028)
  Purchases of bank-owned life insurance                                        -               (1,822)                  -
  Proceeds from sale of foreclosed assets                                     736                1,299                 193
  Expenditures on foreclosed assets                                           (61)                (110)                 (1)
  Net cash provided by business combination                                 3,167                    -                   -
                                                                 ----------------- -------------------- -------------------
          Net cash used by investing activities                          (142,045)            (101,755)            (89,493)
                                                                 ----------------- -------------------- -------------------

Cash flows from financing activities:
  Net proceeds from borrowings                                             14,728               23,600                (740)
  Net increase in deposit accounts                                        130,418               70,895              68,526
  Proceeds from subordinated debentures                                         -                    -              12,372
  Proceeds from issuance of common stock                                    1,859                1,665               1,609
  Excess tax benefits from stock options                                      102                  203                 293
  Purchases and retirement of common stock                                    (75)              (1,513)               (252)
  Cash dividends paid                                                      (2,183)              (1,784)             (1,448)
                                                                 ----------------- -------------------- -------------------
          Net cash provided by financing activities                       144,849               93,066              80,360
                                                                 ----------------- -------------------- -------------------

      Net increase (decrease) in cash and cash equivalents                 10,600                  564              (5,204)

Cash and cash equivalents at beginning of year                             18,275               17,711              22,915
                                                                 ----------------- -------------------- -------------------
Cash and cash equivalents at end of year                         $         28,875  $            18,275  $           17,711
                                                                 ================= ==================== ===================



----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                       - 50 -
<PAGE>

Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
--------------------------------------------------------------------------------


NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The consolidated financial statements include the accounts and transactions of
Four Oaks Fincorp, Inc. (the "Company"), a bank holding company incorporated
under the laws of the State of North Carolina, and its wholly owned
subsidiaries, Four Oaks Bank & Trust Company, Inc. (the "Bank") and Four Oaks
Mortgage Services, LLC, the Company's mortgage origination subsidiary. All
significant intercompany transactions have been eliminated. In March 2006, the
Company formed Four Oaks Statutory Trust I, a wholly owned Delaware statutory
business trust (the "Trust"), for the sole purpose of issuing Trust Preferred
Securities (as defined in Note H below). The Trust is not included in the
consolidated financial statements of the Company, in accordance with Financial
Accounting Standards Board ("FASB") Interpretation No. 46, "Consolidation of
Variable Interest Entities (revised December 2003) - an interpretation of ARB
No. 51" ("FIN 46R").

Nature of Operations

The Company was incorporated under the laws of the State of North Carolina on
February 5, 1997. The Company's primary function is to serve as the holding
company for its wholly owned subsidiaries, the bank and Four Oaks Mortgage
Services, LLC. The bank operates seventeen offices in eastern and central North
Carolina, and its primary source of revenue is derived from loans to customers
and from its securities portfolio. The loan portfolio is comprised mainly of
real estate, commercial, and consumer loans. These loans are primarily
collateralized by residential and commercial properties, commercial equipment,
and personal property.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

Preparing consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the 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. Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for loan losses.

Cash and Cash Equivalents

For the purpose of presentation in the consolidated statements of cash flows,
cash and cash equivalents are defined as those amounts included in the balance
sheet captions cash and due from banks and interest-earning deposits.

Federal regulations require institutions to set aside specified amounts of cash
as reserves against transactions and time deposits. As of December 31, 2008, the
daily average gross reserve requirement was $3.5 million.

Investment Securities

Investment securities are classified into three categories:

(1) Held to Maturity - Debt securities that the Company has the positive intent
and the ability to hold to maturity are classified as held to maturity and
reported at amortized cost;

(2) Trading - Debt and equity securities that are bought and held principally
for the purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses included
in earnings; and


--------------------------------------------------------------------------------

                                       - 51 -
<PAGE>

Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
--------------------------------------------------------------------------------


NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
         (Continued)

(3) Available for Sale - Debt and equity securities not classified as either
securities held to maturity or trading securities are reported at fair value,
with unrealized gains and losses excluded from earnings and reported, net of
income taxes, as other comprehensive income, a separate component of
shareholders' equity. The Company has historically classified all securities as
available for sale. Gains and losses on sales of securities, computed based on
specific identification of adjusted cost of each security, are included in
income at the time of the sale. Premiums and discounts are amortized into
interest income using a method that approximates the interest method over the
period to maturity.

Loans and Allowance for Loan Losses

Loans are stated at the amount of unpaid principal, reduced by an allowance for
loan losses. Interest on loans is calculated by using the simple interest method
on daily balances of the principal amount outstanding.

Loan origination fees are deferred, as well as certain direct loan origination
costs. Such costs and fees are recognized as an adjustment to yield over the
contractual lives of the related loans utilizing the interest method.

The Company evaluates its loan portfolio in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 114, Accounting by Creditors for
Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosure. Under these standards,
a loan is considered impaired, based on current information and events, if it is
probable that the Company will be unable to collect the scheduled payments of
principal and interest when due according to the contractual terms of the loan
agreement. Uncollateralized loans are measured for impairment based on the
present value of expected future cash flows discounted at the historical
effective interest rate or the loan's observable market price, while all
collateral-dependent loans are measured for impairment based on the fair value
of the collateral. If the recorded investment in the loan exceeds the measure of
fair value, a valuation allowance is established as a component of the allowance
for loan losses.

The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loans are
charged against the allowance for loan losses when management believes that the
uncollectibility of a loan balance is confirmed. In addition to the review of
loans considered impaired as discussed above, the allowance for loan losses is
also based upon such factors as changes in the trends in volumes and terms of
loans, levels and trends of charge-offs and recoveries, national and local
economic trends and conditions that may affect the borrowers' ability to pay,
effects of changes in risk selection and underwriting standards as well as
overall portfolio quality. If conditions change substantially from the
assumptions used to evaluate the allowance for loan losses, it is possible that
management's assessment of the allowance may change. In addition, regulatory
examiners may require the bank to recognize changes to the allowance for loan
losses based on their judgments about information available to them at the time
of their examination.

Income Recognition on Impaired and Nonaccrual Loans

Loans, including impaired loans, are generally classified as nonaccrual if they
are past due as to maturity or payment of principal or interest for a period of
more than 90 days, unless such loans are well-secured and in the process of
collection. If a loan or a portion of a loan is classified as doubtful or is
partially charged-off, the loan is generally classified as nonaccrual. Loans
that are on a current payment status or past due less than 90 days may also be
classified as nonaccrual if repayment in full of principal and/or interest is in
doubt.

Loans may be returned to accrual status when all principal and interest amounts
contractually due (including arrearages) are reasonably assured of repayment
within an acceptable period of time and there is a sustained period of repayment
performance (generally a minimum of six months) by the borrower, in accordance
with the contractual terms.


--------------------------------------------------------------------------------

                                       - 52 -
<PAGE>

Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
--------------------------------------------------------------------------------


NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
         (Continued)

While a loan is classified as nonaccrual and the future collectibility of the
recorded loan balance is doubtful, collections of interest and principal are
generally applied as a reduction to the principal outstanding, except in the
case of loans with scheduled amortizations where the payment is generally
applied to the oldest payment due. When the future collectibility of the
recorded loan balance is expected, interest income may be recognized on a cash
basis. In the case where a nonaccrual loan had been partially charged-off,
recognition of interest on a cash basis is limited to that which would have been
recognized on the recorded loan balance at the contractual interest rate.
Receipts in excess of that amount are recorded as recoveries to the allowance
for loan losses until prior charge-offs have been fully recovered.

Foreclosed Assets

Assets acquired as a result of foreclosure are valued at fair value at the date
of foreclosure establishing a new cost basis. After foreclosure, valuations of
the property are periodically performed by management and the assets are carried
at the lower of cost or fair value minus estimated costs to sell. Losses from
the acquisition of property in full or partial satisfaction of debt are treated
as credit losses. Routine holding costs, subsequent declines in value, and gains
or losses on disposition are included in other income and expense.

Bank Premises and Equipment

Land is carried at cost. Buildings, furniture, and equipment are stated at cost
less accumulated depreciation. Depreciation is computed using the straight-line
method based on the estimated useful lives of assets. Useful lives range from 5
to 10 years for furniture and equipment and 40 years for buildings. Expenditures
for repairs and maintenance are charged to expense as incurred.

Goodwill and Other Intangibles

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets. SFAS No. 142 required companies to cease amortizing goodwill
and established a new method for testing goodwill for impairment on an annual
basis. In accordance with provisions of SFAS No. 142, all goodwill resulting
from business combinations is not being amortized. Other intangible assets,
consisting of premiums on purchased core deposits, are being amortized over ten
years principally using the straight-line method. The carrying amount of
goodwill and other intangible assets at December 31, 2008 amounted to $6.1
million and $449,000, respectively.

Income Taxes

Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the tax bases of assets and
liabilities and their carrying amounts for financial reporting purposes.
Deferred tax assets are also recognized for operating loss carry-forwards.
Deferred tax assets and liabilities are measured using enacted tax rates in
effect for the year in which the temporary differences are expected to be
recovered or settled. Deferred tax assets are reduced by a valuation allowance
if it is more likely than not that the tax benefits will not be realized.

The Company adopted the provisions of FIN 48, Accounting for Uncertainty in
Income Taxes, on January 1, 2007 with no impact on the consolidated financial
statements. The Company did not recognize any interest or penalties related to
income tax during the years ended December 31, 2007 and 2008, and did not accrue
any interest or penalties as of December 31, 2008 or 2007. The Company did not
have an accrual for uncertain tax positions as deductions taken and benefits
accrued are based on widely understood administrative practices and procedures,
and are based on clear and unambiguous tax law. Tax returns for all years 2005
and thereafter are subject to possible future examinations by tax authorities.



--------------------------------------------------------------------------------

                                       - 53 -
<PAGE>

Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
--------------------------------------------------------------------------------


NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
         (Continued)

Stock in Federal Home Loan Bank of Atlanta

As a requirement for membership, the Company invests in stock of the FHLB of
Atlanta. This investment is carried at cost. Due to the redemptive provisions of
the FHLB, the Company estimated that fair value equals cost and that this
investment was not impaired as of December 31, 2008.

Comprehensive Income

Comprehensive income is defined as the change in equity during a period for
non-owner transactions and is divided into net income and other comprehensive
income. Other comprehensive income includes revenues, expenses, gains, and
losses that are excluded from earnings under current accounting standards.
Components of other comprehensive income for the Company consist of the
unrealized gains and losses, net of taxes, in the Company's available for sale
securities portfolio and unrealized gains and losses, net of taxes, in the
Company's cash flow hedge instruments.

Accumulated other comprehensive income at December 31, 2008 and 2007 consists of
the following:

<TABLE>
<CAPTION>
                                                                         2008              2007
                                                                   --------------- ------------------
                                                                         (Amounts in thousands)

                       <S>                                                <C>                <C>
Unrealized holding gains (losses) - investment securities
 available for sale                                                $          668  $             740
  Deferred income taxes                                                      (258)              (297)
                                                                   --------------- ------------------
    Net unrealized holding gains (losses) - investment securities
     available for sale                                                       410                443
                                                                   --------------- ------------------

  Total accumulated other comprehensive income (loss)              $          410  $             443
                                                                   =============== ==================
</TABLE>

Stock Compensation Plans

Effective January 1, 2006, the Company adopted SFAS No. 123 (revised 2004),
Share-Based Payment ("SFAS No. 123R"), which was issued by the FASB in December
2004. SFAS No. 123R revises SFAS No. 123 Accounting for Stock-Based
Compensation, and supersedes Accounting Principles Board Opinion ("APB") No. 25,
Accounting for Stock Issued to Employees, and its related interpretations. SFAS
No. 123R requires recognition of the cost of employee services received in
exchange for an award of equity instruments in the financial statements over the
period the employee is required to perform the services in exchange for the
award (usually the vesting period). SFAS No. 123R also requires measurement of
the cost of employee services received in exchange for an award based on the
grant-date fair value of the award. SFAS No. 123R also amends SFAS No. 95,
Statement of Cash Flows, to require that excess tax benefits be reported as
financing cash inflows, rather than as a reduction of taxes paid, which is
included within operating cash flows.

The Company adopted SFAS No. 123R using the modified prospective application as
permitted under SFAS No. 123R. Accordingly, prior period amounts have not been
restated. Under this application, the Company is required to record compensation
expense for all awards granted after the date of adoption and for the unvested
portion of previously granted awards that remain outstanding at the date of
adoption. Prior to the adoption of SFAS No. 123R, the Company used the intrinsic
value method as prescribed by APB No. 25 and thus recognized no compensation
expense for options granted with exercise prices equal to the fair market value
of the Company's common stock on the date of grant.


--------------------------------------------------------------------------------

                                       - 54 -
<PAGE>

Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
--------------------------------------------------------------------------------


NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
         (Continued)

Net Income Per Common Share and Common Shares Outstanding

Basic earnings per share represents income available to common shareholders
divided by the weighted average number of common shares outstanding during the
period. Diluted earnings per share reflect additional common shares that would
have been outstanding if dilutive potential common shares had been issued, as
well as any adjustment to income that would result from the assumed issuance.
All references to net income per share, weighted average shares outstanding, and
dividends per share have been retroactively adjusted for a 10% stock dividend
issued on October 3, 2007 and a five for four stock split distributed in the
form of 25% stock dividend on November 10, 2006. Potential common shares that
may be issued by the Company relate solely to outstanding stock options.

Basic and diluted net income per common share have been computed based upon net
income as presented in the accompanying consolidated statements of operations
divided by the weighted average number of common shares outstanding or assumed
to be outstanding as summarized below:

<TABLE>
<CAPTION>
                                                   2008          2007          2006
                                               -----------   -----------   -----------
               <S>                                  <C>           <C>           <C>
Weighted average number of common shares
 used in computing basic net income
 per share                                       6,554,450     6,170,140     6,080,778

Effect of dilutive stock options                     2,317        22,419        56,444
                                               -----------   -----------   -----------

Weighted average number of commons shares
 and dilutive potential common shares used in
 computing diluted net income per share          6,556,767     6,192,559     6,137,222
                                               ===========   ===========   ===========
</TABLE>

There were 165,605 antidilutive shares outstanding for the year ended December
31, 2008. As of December 31, 2007 and 2006, there were no antidilutive shares
outstanding.

Derivative Instruments

The Company utilizes interest rate swaps in the management of interest rate
risk. Interest rate swaps are contractual agreements between two parties to
exchange a series of cash flows representing interest payments. A swap allows
both parties to alter the repricing characteristics of assets or liabilities
without affecting the underlying principal positions. Through the use of a swap,
assets and liabilities may be transformed from fixed to floating rates, from
floating rates to fixed rates, or from one type of floating rate to another.
Swap terms generally range from one year to ten years depending on the need.

The net interest payable or receivable on interest rate swaps that are
designated as hedges is accrued and recognized as an adjustment to the interest
income or expense of the related asset or liability. Gains and losses from early
terminations of derivatives are deferred and amortized as yield adjustments over
the shorter of the remaining term of the hedged asset or liability or the
remaining term of the derivative instrument. Upon disposition or settlement of
the asset or liability being hedged, deferral accounting is discontinued and any
gains or losses are recognized in income. Unrealized holding gains and losses on
derivatives designated as cash flow hedges are reported, net of applicable
income tax effect, in accumulated other comprehensive income.

Derivative financial instruments that fail to qualify as a hedge are carried at
fair value with gains and losses recognized in current earnings.



--------------------------------------------------------------------------------

                                       - 55 -
<PAGE>

Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
--------------------------------------------------------------------------------


NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
         (Continued)

New Accounting Standards

SFAS No. 157, Fair Value Measurements, was issued in September 2006. In defining
fair value, SFAS No. 157 retains the exchange price notion in earlier
definitions of fair value. However, the definition of fair value under SFAS No.
157 focuses on the price that would be received to sell an asset or paid to
transfer a liability (an exit price), not the price that would be paid to
acquire the asset or received to assume the liability (an entry price). SFAS No.
157 applies whenever other accounting pronouncements require or permit assets or
liabilities to be measured at fair value. Accordingly, SFAS No. 157 does not
expand the use of fair value in any new circumstances. SFAS No. 157 also
establishes a fair value hierarchy that prioritizes the information used to
develop assumptions used to determine the exit price. Under this standard, fair
value measurements would be disclosed separately by level within the fair value
hierarchy. The Company adopted SFAS No. 157 effective January 1, 2008. The
adoption of SFAS No. 157 had no effect on the Company's financial condition or
results of operations. For additional information on the fair value of certain
financial assets and liabilities, see Note M to the consolidated financial
statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities. SFAS No. 159 creates a fair value
option allowing an entity irrevocably to elect fair value as the initial and
subsequent measurement attribute for certain financial assets and financial
liabilities, with changes in fair value recognized in earnings as they occur.
SFAS No. 159 requires an entity to report those financial assets and financial
liabilities measured at fair value in a manner that separates those reported
fair values from the carrying amounts of assets and liabilities measured using
another measurement attribute on the face of the statement of financial
position. SFAS No. 159 also requires an entity to provide information that would
allow users to understand the effect on earnings of changes in the fair value on
those instruments selected for the fair value election. The Company adopted SFAS
No. 159 effective January 1, 2008. There was no initial effect of adoption since
the Company did not elect the fair value option for any existing asset or
liability. In addition, the Company did not elect the fair value option for any
financial assets originated or purchased, or for liabilities issued, through
December 31, 2008.

In December 2007, the FASB issued SFAS No. 141(revised 2007), Business
Combinations ("SFAS No. 141(R)"), which replaces SFAS No. 141. SFAS No. 141(R)
establishes principles and requirements for recognition and measurement of
assets, liabilities and any noncontrolling interest acquired due to a business
combination. SFAS No. 141(R) expands the definitions of a business and a
business combination, resulting in an increased number of transactions or other
events that will qualify as business combinations. Under SFAS No. 141(R) the
entity that acquires the business (the "acquirer") will record 100 percent of
all assets and liabilities of the acquired business, including goodwill,
generally at their fair values. As such, an acquirer will not be permitted to
recognize the allowance for loan losses of the acquiree. SFAS No. 141(R)
requires the acquirer to recognize goodwill as of the acquisition date, measured
as a residual. In most business combinations, goodwill will be recognized to the
extent that the consideration transferred plus the fair value of any
noncontrolling interests in the acquiree at the acquisition date exceeds the
fair values of the identifiable net assets acquired. Under SFAS No. 141(R),
acquisition-related transaction and restructuring costs will be expensed as
incurred rather than treated as part of the cost of the acquisition and included
in the amount recorded for assets acquired. SFAS No. 141(R) is effective for
fiscal years beginning after December 15, 2008. Accordingly, for acquisitions
completed after December 31, 2008, the Company will apply the provisions of SFAS
No. 141(R).

In December  2007,  the FASB issued SFAS No. 160,  Noncontrolling  Interests  in
Consolidated  Financial  Statements,  an amendment of ARB No. 51, which  defines
noncontrolling   interest  as  the  portion  of  equity  in  a  subsidiary   not
attributable,  directly or indirectly,  to the parent. SFAS No. 160 requires the
ownership  interests  in  subsidiaries  held by  parties  other  than the parent
(previously  referred to as minority  interest)  to be clearly  presented in the
consolidated  statement of financial  position within equity,  but separate from
the parent's equity.  The amount of consolidated net income  attributable to the
parent and to any noncontrolling  interest must be clearly presented on the face
of the  consolidated  statement  of income.  Changes in the  parent's  ownership
interest while the parent retains its controlling  financial  interest  (greater
than 50 percent ownership) are to be accounted for as equity transactions.  Upon
a loss of control,  any gain or loss on the interest  sold will be recognized in
earnings.  Additionally,  any ownership  interest retained will be remeasured at
fair value on the date  control  is lost,  with any gain or loss  recognized  in
earnings.  SFAS No. 160 is effective for fiscal years  beginning  after December
15, 2008. Accordingly,  the Company will adopt the provisions of SFAS No. 160 in
the first  quarter  2009.  The  Company  does not  expect  the  adoption  of the
provisions of SFAS No. 160 to have a material effect on its financial  condition
and results of operations.


--------------------------------------------------------------------------------

                                       - 56 -
<PAGE>

Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
--------------------------------------------------------------------------------


NOTE A - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
         (Continued)

SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities,
an amendment of FASB Statement No. 133, issued in March 2008, requires enhanced
disclosures about an entity's derivative and hedging activities. These enhanced
disclosures will discuss (a) how and why an entity uses derivative instruments;
(b) how derivative instruments and related hedged items are accounted for under
SFAS No. 133, and its related interpretations; and (c) how derivative
instruments and related hedged items affect an entity's financial position,
financial performance, and cash flows. SFAS No. 161 is effective for financial
statements issued for fiscal years beginning after November 15, 2008 with
earlier adoption allowed. The Company does not believe that the adoption of SFAS
No. 161 will have a material effect on its financial condition or results of
operations.

FSP No. FAS 157-3, Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active ("FSP FAS 157-3"), issued in October 2008,
clarifies the application of SFAS No. 157 in a market that is not active and
provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not
active. FSP FAS 157-3 was effective upon issuance, including prior periods for
which financial statements have not been issued. Revisions resulting from a
change in the valuation technique or its application should be accounted for as
a change in accounting estimate following the guidance in SFAS No. 154,
Accounting Changes and Error Corrections. However, the disclosure provisions in
SFAS No. 154 for a change in accounting estimate are not required for revisions
resulting from a change in valuation technique or its application.

As FSP FAS 157-3 clarified but did not change the application of SFAS No. 157,
the adoption of FSP FAS 157-3 had no effect on the Company's financial condition
or results of operations.

Other accounting standards that have been issued or proposed by the FASB or
other standards-setting bodies are not expected to have a material impact on the
Company's financial position, results of operations and cash flows.

From time to time the FASB issues exposure drafts for proposed statements of
financial accounting standards. Such exposure drafts are subject to comment from
the public, to revisions by the FASB and to final issuance by the FASB as
statements of financial accounting standards. Management considers the effect of
the proposed statements on the consolidated financial statements of the Company
and monitors the status of changes to and proposed effective dates of exposure
drafts.

Reclassifications

Certain items included in the 2007 and 2006 consolidated financial statements
have been reclassified to conform to the 2008 presentation. These
reclassifications have no effect on the net income or shareholders' equity
previously reported.



--------------------------------------------------------------------------------

                                       - 57 -
<PAGE>

Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
--------------------------------------------------------------------------------


NOTE B - INVESTMENT SECURITIES

The amortized cost, gross unrealized gains, gross unrealized losses and fair
values of securities available for sale as of December 31, 2008 and 2007 are as
follows:

<TABLE>
<CAPTION>
                                                   Gross          Gross
                                   Amortized     Unrealized     Unrealized
                                     Cost          Gains          Losses       Fair Value
                                  -----------   ------------   ------------   ------------
                                                   (Amounts in thousands)
2008:
            <S>                       <C>             <C>           <C>           <C>
U.S. government and agency
 securities                       $    65,590   $        161   $          3   $     65,748
State and municipal securities         46,852            301            178         46,975
Mortgage-backed securities             53,899          1,171             57         55,013
Other                                   4,982              -            727          4,255
                                  -----------   ------------   ------------   ------------
                                  $   171,323   $      1,633   $        965   $    171,991
                                  ===========   ============   ============   ============
</TABLE>


<TABLE>
<CAPTION>

                                                   Gross          Gross
                                   Amortized     Unrealized     Unrealized
                                     Cost          Gains          Losses       Fair Value
                                  -----------   ------------   ------------   ------------
                                                   (Amounts in thousands)
2007:
           <S>                       <C>              <C>           <C>           <C>
U.S. government and agency
 securities                       $    92,651   $        559   $          2   $     93,208
State and municipal securities          6,136             17              5          6,148
Mortgage-backed securities             12,985            122             20         13,087
Other                                   1,789             69              -          1,858
                                  -----------   ------------   ------------   ------------
                                  $   113,561   $        767   $         27   $    114,301
                                  ===========   ============   ============   ============
</TABLE>

The following table shows gross unrealized losses and fair values of investment
securities, aggregated by investment category and length of time that the
individual securities have been in a continuous unrealized loss position, at
December 31, 2008 and 2007. As of December 31, 2008, the unrealized losses
relate to two U.S. government agency securities, four mortgage-backed
securities, thirty-five municipal securities and fifteen other securities. None
of the securities had continuous unrealized losses for more than twelve months.
The unrealized losses relate to debt securities that have incurred fair value
reductions due to higher market interest rates since the securities were
purchased. The unrealized losses are not likely to reverse unless and until
market interest rates decline to the levels that existed when the securities
were purchased. Since none of the unrealized losses relate to the marketability
of the securities or the issuer's ability to honor redemption obligations, none
of the securities are deemed to be other than temporarily impaired.



--------------------------------------------------------------------------------

                                       - 58 -
<PAGE>

Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
--------------------------------------------------------------------------------


NOTE B - INVESTMENT SECURITIES (Continued)

<TABLE>
<CAPTION>
                                                                   2008
                                     ----------------------------------------------------------------
                                      Less Than 12 Months    12 Months or More          Total
                                     ---------------------- -------------------- --------------------
                                        Fair     Unrealized   Fair    Unrealized   Fair    Unrealized
                                        value      losses     value     losses     value     losses
                                     ----------- ---------- --------- ---------- --------- ----------
                                                          (Amounts in thousands)
Securities available for sale:
            <S>                           <C>        <C>       <C>        <C>        <C>        <C>
  U.S. government and agency
   securities                        $     3,992 $        3 $       - $        - $   3,992 $        3
  State and municipal securities          14,097        178         -          -    14,097        178
  Mortgage-backed securities               4,253         57         -          -     4,253         57
  Other                                       96         47       930        680     1,025        727
                                     ----------- ---------- --------- ---------- --------- ----------

  Total temporarily impaired
   securities                        $    22,438 $      285 $     930 $      680 $  23,367 $      965
                                     =========== ========== ========= ========== ========= ==========
</TABLE>



<TABLE>
<CAPTION>
                                                                   2007
                                     ----------------------------------------------------------------
                                      Less Than 12 Months    12 Months or More          Total
                                     ---------------------- -------------------- --------------------
                                        Fair     Unrealized   Fair    Unrealized   Fair    Unrealized
                                        value      losses     value     losses     value     losses
                                     ----------- ---------- --------- ---------- --------- ----------
                                                          (Amounts in thousands)
Securities available for sale:
              <S>                         <C>       <C>         <C>       <C>        <C>       <C>
  U.S. government and agency
   securities                        $    14,983 $        2 $       - $        - $  14,983 $        2
  State and municipal securities             139          -     1,519          5     1,658          5
  Mortgage-backed securities                   -          -     2,439         20     2,439         20
                                     ----------- ---------- --------- ---------- --------- ----------

  Total temporarily impaired
   securities                        $    15,122 $        2 $   3,958 $       25 $  19,080 $       27
                                     =========== ========== ========= ========== ========= ==========
</TABLE>


The amortized cost and fair value of available for sale securities at December
31, 2008 by contractual maturities are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.



--------------------------------------------------------------------------------

                                       - 59 -
<PAGE>

Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
--------------------------------------------------------------------------------


NOTE B - INVESTMENT SECURITIES (Continued)

<TABLE>
<CAPTION>
                                                        Amortized
                                                          Cost        Fair Value
                                                      ------------- --------------
                                                         (Amounts in thousands)
           <S>                                               <C>           <C>
Due within one year                                   $           - $            -
Due after one year through five years                         2,685          2,729
Due after five years through ten years                       52,866         53,026
Due after ten years                                         115,772        116,235
                                                      ------------- --------------

                                                      $     171,323 $      171,991
                                                      ============= ==============
</TABLE>


Securities with a carrying value of approximately $120.9 million and $98.5
million at December 31, 2008 and 2007, respectively, were pledged to secure
public deposits and for other purposes required or permitted by law.

Sales and calls of securities available for sale during 2008, 2007 and 2006
generated gross realized gains of $635,000, $82,000, and $15,000, respectively
and gross realized losses of $59,000, $118,000, and $136,000, respectively.

NOTE C - LOANS AND ALLOWANCE FOR LOAN LOSSES

Major classifications of loans as of December 31, 2008 and 2007 are summarized
as follows:

                                          2008         2007
                                      ----------- ------------
                                       (Amounts in thousands)

Real estate - residential and other   $  310,773  $   217,247
Real estate - agricultural                15,683       12,700
Construction and land development        274,687      252,449
Other agricultural                         3,060        3,119
Consumer loans                            15,494       12,566
Commercial loans                          51,663       45,653
Other loans                               10,329        1,779
                                      ----------- ------------
                                         681,689      545,512
Less:
   Net deferred loan fees and costs         (189)        (243)
   Allowance for loan losses              (9,542)      (6,653)
                                      ----------- ------------

                                      $  671,958  $   538,617
                                      =========== ============

Nonperforming assets at December 31, 2008 and 2007 consist of the following:



--------------------------------------------------------------------------------

                                       - 60 -
<PAGE>

Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
--------------------------------------------------------------------------------


NOTE C - LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)

                                          2008       2007
                                      ----------- ----------
                                      (Amounts in thousands)

Loans past due ninety days or more
 and still accruing                   $     1,046 $       52
Nonaccrual loans                           20,804      1,254
Foreclosed assets (included in other
 assets)                                    1,191      1,688
                                      ----------- ----------

                                      $    23,041 $    2,994
                                      =========== ==========

At December 31, 2008, the recorded  investment in loans  considered  impaired in
accordance  with SFAS No. 114  totaled  $20.8  million.  This  amount  consisted
entirely of  nonaccrual  loans.  At December 31, 2007,  the  investment in loans
considered impaired consisted of both accrual and nonaccrual loans in the amount
of $5.6 million and $1.2 million, respectively.  Impaired loans of $17.0 million
and $4.4 million had related allowances for loan losses of $2.9 million and $2.2
million  at  December  31,  2008 and 2007,  respectively.  For the  years  ended
December 31, 2008 and 2007,  the average  recorded  investment in impaired loans
was  approximately  $9.9 million and $5.0 million,  respectively.  The amount of
interest  recognized on impaired  loans during the portion of the year that they
were impaired was not material.

A summary of the allowance for loan losses for the years ended December 31,
2008, 2007 and 2006 is as follows:

                                     2008      2007      2006
                                  ---------- --------- ---------
                                      (Amounts in thousands)

Balance, beginning                $   6,653  $  5,566  $  4,965
Provision for loan losses             3,336     1,362       873
Loans charged-off                    (1,995)     (504)     (458)
Recoveries of loans previously
 charged-off                            158       229       186
Merger with Longleaf Community
 Bank                                 1,390         -         -
                                  ---------- --------- ---------

Balance, ending                   $   9,542  $  6,653  $  5,566
                                  ========== ========= =========

The Company had loan and deposit relationships with most of its directors and
executive officers and with companies with which certain directors and executive
officers are associated. The following is a reconciliation of loans directly
outstanding to executive officers, directors, and their affiliates (amounts in
thousands):

Balance at December 31, 2007                         $        6,941
New loans                                                         -
Principal repayments                                         (2,474)
                                                     ---------------

Balance at December 31, 2008                         $        4,467
                                                     ===============

As a matter of policy, these loans and credit lines are approved by the
Company's Board of Directors and are made with interest rates, terms, and
collateral requirements comparable to those required of other borrowers. In the
opinion of management, these loans do not involve more than the normal risk of
collectibility. At December 31, 2008, the Company had pre-approved but unused
lines of credit totaling $434,000 to executive officers, directors and their
affiliates.



--------------------------------------------------------------------------------

                                       - 61 -
<PAGE>

Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
--------------------------------------------------------------------------------


NOTE D - BANK PREMISES AND EQUIPMENT

Company premises and equipment at December 31, 2008 and 2007 are as follows:

                                               2008            2007
                                         --------------- --------------
                                             (Amounts in thousands)

Land                                     $        4,482  $       2,815
Buildings                                        12,468          9,501
Furniture and equipment                          10,162          9,159
                                         --------------- --------------
                                                 27,112         21,475
Less accumulated depreciation                    (9,956)        (8,848)
                                         --------------- --------------
                                         $       17,156  $      12,627
                                         =============== ==============

Depreciation expense for the year ended December 31, 2008, was $1.1 million. For
the years ended December 31, 2007 and 2006 depreciation expenses amounted to
$1.0 million for each year.

NOTE E - GOODWILL AND OTHER INTANGIBLES

<TABLE>
<CAPTION>
The following is a summary of goodwill and other intangible assets at December 31, 2008 and 2007:

                                               2008                   2007
                                       -------------------- ----------------------
(Amounts in thousands)

          <S>                                   <C>                   <C>
Goodwill, beginning of year                               -                      -
Goodwill acquired during the year                     6,083                      -
                                       -------------------- ----------------------
Goodwill, end of year                  $              6,083   $                  -
                                       ==================== ======================

Other intangibles - gross                               686                    216
Less accumulated amortization                           236                    191
                                       -------------------- ----------------------

Other intangibles - net                $                449   $                 25
                                       ==================== ======================
</TABLE>

Other intangibles amortization expense for the years ended December 31, 2008,
2007 and 2006 amounted to $46,000, $14,000, and $14,000, respectively. Estimated
amortization expense for other intangibles for future years are as follows
(amounts in thousands):

       2009                                              $            58
       2010                                                           47
       2011                                                           47
       2012                                                           47
       2013                                                           47
       2014 and beyond                                               203
                                                        ----------------

                                                         $           449
                                                        ================



--------------------------------------------------------------------------------

                                       - 62 -
<PAGE>

Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
--------------------------------------------------------------------------------


NOTE F - DEPOSITS

At December 31, 2008, the scheduled maturities of time deposits are as follows
(amounts in thousands):

                                    Less than    $100,000 or
                                     $100,000       more         Total
                                  ------------- ----------- ---------------

Within one year                   $     159,389 $   254,067 $       413,456
Over one year through three years        24,154      21,645          45,799
Over three years                          2,496       2,823           5,320
                                  ------------- ----------- ---------------

                                  $     186,039 $   278,535 $       464,574
                                  ============= =========== ===============

NOTE G - BORROWINGS

At December 31, 2008 and 2007, borrowed funds included the following FHLB
advances (amounts in thousands):

<TABLE>
<CAPTION>
         Maturity              Interest Rate             2008               2007
--------------------------- -------------------- ------------------- ------------------

          <S>                      <C>                    <C>                <C>
May 25, 2016                    4.46% Fixed       $            5,000 $            5,000
November 17, 2016               4.11% Fixed                    5,000              5,000
November 30, 2016               4.09% Fixed                    7,000              7,000
June 5, 2017                    4.35% Fixed                   10,000             10,000
July 3, 2017                    4.36% Fixed                   13,000             13,000
July 24, 2017                   4.34% Fixed                    5,000              5,000
July 31, 2017                   4.35% Fixed                    5,000              5,000
August 14, 2017                 4.08% Fixed                    5,000              5,000
August 14, 2017                 3.94% Fixed                    5,000              5,000
October 4, 2017                 3.95% Fixed                    7,000              7,000
February 5, 2018                2.06% Fixed                   10,000                  -
June 5, 2018                    2.25% Fixed                    5,000                  -
June 5, 2018                    2.55% Fixed                    5,000                  -
June 5, 2018                    3.03% Fixed                    5,000                  -
September 10, 2018              3.14% Fixed                   10,000                  -
September 18, 2018              2.71% Fixed                   10,000                  -
November 17, 2011               4.15% Fixed                      814                  -
February 17, 2009               5.10% Fixed                    1,500                  -
Advances repaid in 2008                                            -             20,000
                                                 ------------------- ------------------
                                                  $          114,314 $           87,000
                                                 =================== ==================
</TABLE>

The above advances are secured by a floating lien covering the Company's loan
portfolio of qualifying residential (1-4 units) first mortgage loans. At
December 31, 2008, the Company has available lines of credit totalling $70.6
million with the FHLB for borrowing dependent on adequate collateralization. The
weighted average rates for the above borrowings at December 31, 2008 and 2007
were 4.07% and 4.73%, respectively.

In addition to the above advances, the Company has lines of credit of $38.2
million from various financial institutions to purchase federal funds on a
short-term basis. The Company has no federal fund purchases outstanding as of
December 31, 2008. The Company had $10.0 million outstanding as of December 31,
2007.



--------------------------------------------------------------------------------

                                       - 63 -
<PAGE>

Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
--------------------------------------------------------------------------------


NOTE H - TRUST PREFERRED SECURITIES

On March 30, 2006, $12.0 million of trust preferred securities ("Trust Preferred
Securities") were placed through the Trust. The Trust has invested the net
proceeds from the sale of the Trust Preferred Securities in Junior Subordinated
Deferrable Interest Debentures (the "Debentures") issued by the Company and
recorded in borrowings on the accompanying consolidated balance sheet. The Trust
Preferred Securities pay cumulative cash distributions quarterly at an annual
rate, reset quarterly, equal to three month LIBOR plus 1.35%. The dividends paid
to holders of the Trust Preferred Securities, which will be recorded as interest
expense, are deductible for income tax purposes. The Trust Preferred Securities
are redeemable on June 15, 2011 or afterwards in whole or in part, on any June
15, September 15, December 15, or March 15. Redemption is mandatory by June 15,
2036. The Company has fully and unconditionally guaranteed the Trust Preferred
Securities through the combined operation of the Debentures and other related
documents. The Company's obligation under the guarantee is unsecured and
subordinate to senior and subordinated indebtedness of the Company. The Trust
Preferred Securities qualify as Tier I capital for regulatory capital purposes
subject to certain limitations.


NOTE I - INCOME TAXES

Allocation  of income tax expense  between  current and deferred  portions is as
follows:

<TABLE>
<CAPTION>
                                              Years Ended December 31,
                                  -------------------------------------------------
                                        2008               2007            2006
                                  -----------------   ---------------  ------------
                                               (Amounts in thousands)
Current tax expense:
          <S>                         <C>                 <C>              <C>
 Federal                          $          1,586    $        3,384   $     3,513
 State                                          66               326           433
                                  -----------------   ---------------  ------------
                                             1,652             3,710         3,946
                                  -----------------   ---------------  ------------
Deferred tax expense:
 Federal                                       (38)             (426)         (269)
 State                                          35               (97)          (50)
                                  -----------------   ---------------  ------------
                                                (3)             (523)         (319)
                                  -----------------   ---------------  ------------

                                  $          1,649    $        3,187   $     3,627
                                  =================   ===============  ============
</TABLE>

The reconciliation of expected income tax at the statutory federal rate of 34%
with income tax expense is as follows:

<TABLE>
<CAPTION>
                                                           Years Ended December 31,
                                           --------------------------------------------------------
                                                  2008               2007               2006
                                           ------------------ ------------------ ------------------
                                                            (Amounts in thousands)

              <S>                                 <C>                <C>                <C>
Expense computed at statutory rate of 34%  $           1,999  $           3,005  $           3,619
Effect of state income taxes, net of
 federal benefit                                          66                151                253
Tax exempt income                                       (232)               (59)               (51)
(Income) loss from investment in life
 insurance                                              (178)                70               (187)
Other, net                                                (6)                20                 (7)
                                           ------------------ ------------------ ------------------

                                           $            1,649  $           3,187  $           3,627
                                           ================== ================== ==================
</TABLE>




--------------------------------------------------------------------------------

                                       - 64 -
<PAGE>

Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
--------------------------------------------------------------------------------


NOTE I - INCOME TAXES (Continued)

Deferred income taxes consist of the following:

                                                     Years Ended December 31,
                                                   ----------------------------
                                                       2008            2007
                                                   ------------    ------------
                                                      (Amounts in thousands)
Deferred tax assets:
   Allowance for loan losses                       $     3,589     $      2,520
   Non-qualified stock options                             231              148
   Unamortized investment premiums                          (3)              15
   Net deferred loan fees                                   73               94
   Deductible merger expenses                              164                -
   SERP accrual                                             80               68
   Other                                                   108               29
                                                   ------------    ------------
      Total deferred tax assets                          4,242            2,874
                                                   ------------    ------------

Deferred tax liabilities:
   Property and equipment                          $       748              640
   Unrealized gain on securities                           258              297
   Prepaid expense                                         151              132
   Fair market value adjustment on purchased
    assets                                                 306                -
   Other                                                     4               16
                                                   ------------    ------------
      Total deferred tax liabilities                     1,467            1,085
                                                   ------------    ------------

      Net deferred tax asset included in other
       assets                                      $     2,775     $      1,789
                                                   ============    ============


When tax returns are filed, it is highly certain that some positions taken would
be sustained upon examination by the taxing authorities, while others are
subject to uncertainty about the merits of the position taken or the amount of
the position that would be ultimately sustained. The benefit of a tax position
is recognized in the financial statements in the period during which, based on
all available evidence, management believes it is more likely than not that the
position will be sustained upon examination, including the resolution of appeals
or litigation processes, if any. Tax positions taken are not offset or
aggregated with other positions. Tax positions that meet the
more-likely-than-not recognition threshold are measured as the largest amount of
tax benefit that is more than 50 percent likely of being realized upon
settlement with the applicable taxing authority. The portion of the benefits
associated with tax positions taken that exceeds the amount measured as
described above is reflected as a liability for unrecognized tax benefits in the
accompanying consolidated balance sheet along with any associated interest and
penalties that would be payable to the taxing authorities upon examination.

NOTE J - REGULATORY RESTRICTIONS

The bank, as a North Carolina banking corporation, may pay dividends to the
Company only out of undivided profits as determined pursuant to North Carolina
General Statutes Section 53-87. However, regulatory authorities may limit
payment of dividends by any bank when it is determined that such a limitation is
in the public interest and is necessary to ensure the financial soundness of the
bank.

Current Federal regulations require that the Bank maintain a minimum ratio of
total capital to risk weighted assets of 8%, with at least 4% being in the form
of Tier 1 capital, as defined in the regulations. In addition, the Bank must
maintain a leverage ratio of 4%. As of December 31, 2008, the Bank's capital
exceeded the current capital requirements. The Bank currently expects to
continue to exceed these minimums without altering current operations or
strategy.

--------------------------------------------------------------------------------

                                       - 65 -
<PAGE>

Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
--------------------------------------------------------------------------------

NOTE J - REGULATORY RESTRICTIONS (Continued)

The Bank is subject to various regulatory capital requirements administered by
the federal and state banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Quantitative measures
established by regulation to ensure capital adequacy require the Bank to
maintain minimum amounts and ratios, as set forth in the table below. Management
believes, as of December 31, 2008, that the Bank meets all capital adequacy
requirements to which it is subject.

As of December 31, 2008, the most recent notification from the FDIC categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must maintain
minimum amounts and ratios as set forth in the table below. There are no
conditions or events since that notification that management believes have
changed the Bank's category.

The Bank's actual capital amounts and ratios are also presented in the table
below (dollars in thousands):

<TABLE>
<S>                                        <C>                <C>   <C>              <C>  <C>            <C>
                                                                                              Minimum To Be
                                                                                            Well Capitalized
                                                                                              Under Prompt
                                                                     Minimum for Capital    Corrective Action
                                                    Actual             Adequacy Purposes       Provisions
                                           ------------------------ -------------------------------------------
                                              Amount       Ratio      Amount     Ratio      Amount     Ratio
                                           ------------- ---------- ---------- ---------- ---------- ----------
As of December 31, 2008:
------------------------
Total Capital (to Risk Weighted Assets)    $      75,330      10.7% $   56,376       8.0% $   70,470     10.0%
Tier I Capital (to Risk Weighted Assets)          66,512       9.4%     28,188       4.0%     42,282      6.0%
Tier I Capital (to Average Assets)                66,512       7.4%     35,783       4.0%     44,729      5.0%

As of December 31, 2007:
------------------------
Total Capital (to Risk Weighted Assets)    $      67,505      11.9% $   45,458       8.0% $   56,822     10.0%
Tier I Capital (to Risk Weighted Assets)          60,852      10.7%     22,729       4.0%     34,093      6.0%
Tier I Capital (to Average Assets)                60,852       8.9%     27,501       4.0%     34,378      5.0%
</TABLE>

The Company is also subject to these capital requirements. At December 31, 2008
and 2007, the Company's total capital to risk weighted assets, Tier 1 capital to
risk weighted assets and Tier 1 capital to average assets were 11.5%, 10.1%, and
8.0%, and 12.9%, 11.7%, and 10.2%, respectively.


NOTE K - DERIVATIVES

Derivative Financial Instruments

From time to time, the Company has stand-alone derivative financial instruments
in the form of interest rate swap agreements, which derive their value from
underlying interest rates. These transactions involve both credit and market
risk. The notional amounts are amounts on which calculations, payments, and the
value of the derivative are based. Notional amounts do not represent direct
credit exposures. Direct credit exposure is limited to the net difference
between the calculated amounts to be received and paid, if any. Such difference,
which represents the fair value of the derivative instruments, is reflected on
the Company's consolidated balance sheets as derivative assets and derivative
liabilities.


--------------------------------------------------------------------------------

                                       - 66 -
<PAGE>

Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
--------------------------------------------------------------------------------

NOTE K - DERIVATIVES (Continued)

The Company is exposed to credit-related losses in the event of nonperformance
by the counterparties to these agreements. The Company controls the credit risk
of its financial contracts through credit approvals, limits and monitoring
procedures, and does not expect any counterparties to fail their obligations.
The Company deals only with primary dealers.

Derivative instruments are generally either negotiated over-the-counter ("OTC")
contracts or standardized contracts executed on a recognized exchange.
Negotiated OTC derivative contracts are generally entered into between two
counterparties that negotiate specific agreements terms, including the
underlying instruments, amount, exercise prices and maturity.

Risk Management Policies - Hedging Instruments

The primary focus of the Company's asset/liability management program is to
monitor the sensitivity of the Company's net portfolio value and net income
under varying interest rate scenarios to take steps to control its risks. On a
quarterly basis, the Company simulates the net portfolio value and net income
expected to be earned over a twelve-month period following the date of
simulation. The simulation is based on a projection of market interest rates at
varying levels and estimates the impact of such market rates on the levels of
interest-earning assets and interest-bearing liabilities during the measurement
period. Based upon the outcome of the simulation analysis, the Company considers
the use of derivatives as a means of reducing the volatility of net portfolio
value and projected net income within certain ranges of projected changes in
interest rates. The Company evaluates the effectiveness of entering into any
derivative instrument agreement by measuring the cost of such an agreement in
relation to the reduction in net portfolio value and net income volatility
within an assumed range of interest rates.

Interest Rate Risk Management - Cash Flow Hedging Instruments

The Company originates variable rate loans for its loan portfolio. These loans
expose the Company to variability in cash flows, primarily from interest
receipts due to changes to interest rates. If interest rates increase, interest
income increases. Conversely, if interest rates decrease, interest income
decreases. Management believes it is prudent to limit the variability of a
portion of its cash flows on variable rate loans therefore, generally hedges a
portion of its variable-rate receipts. To meet this objective, management enters
into interest rate swap agreements whereby the Company receives fixed rate
payments and makes variable rate payments during the contract period.

At December 31, 2008 and 2007 there were no outstanding interest rate swap
agreements used to hedge variable rate loans.

Interest Rate Risk Management - Fair Value Hedging Instruments

The Company uses funds from fixed rate time deposits in its lending and
investment activities and for other general purposes. These debt obligations
expose the Company to variability in their fair value due to changes in the
level of interest rates. Management believes that it is prudent to limit the
variability in the fair value of a portion of its fixed-rate funding. It is the
Company's objective to hedge the change in fair value of fixed-rate funding
coverage levels that are appropriate, given anticipated or existing interest
rate levels and other market considerations, as well as the relationship of
change in this liability to other liabilities of the Company. To meet this
objective, the Company utilized interest rate swaps as an asset/liability
management strategy to hedge the change in value of the funding due to changes
in expected interest rate assumptions. These interest rate swap agreements are
contracts to make a series of floating rate payments in exchange for receiving a
series of fixed rate payments.

--------------------------------------------------------------------------------

                                       - 67 -
<PAGE>

Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
--------------------------------------------------------------------------------

NOTE K - DERIVATIVES (Continued)

All interest rate swap agreements were terminated during 2008. At December 31,
2007, the information pertaining to outstanding interest rate swap agreements
used to hedge fixed-rate funding is as follows (dollars in thousands):

                                                               2007
                                                           ------------

Notional amount                                            $    33,301
Weighted average pay rate                                         4.93%
Weighted average receive rate                                     4.25%
Weighted average maturity in years                                 2.2
Unrealized gain (loss) relating to interest rate swaps     $       (16)

These agreements required the Company to make payments at variable-rate
determined by a specified index (LIBOR) in exchange for receiving payments at a
fixed-rate.

The interest rate swap agreement used to hedge variable rate loans expired July
30, 2008. No other interest rate swaps were terminated during 2008 or 2007. At
December 31, 2007, the Company's interest rate swaps used to hedge fixed-rate
funding reflected an unrealized loss of $16,000.

NOTE L - COMMITMENTS AND CONTINGENCIES

The Company is a party to financial instruments with off-balance sheet credit
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and
letters of credit. Those instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the balance
sheet. The contract or notional amounts of those instruments reflect the extent
of involvement the Bank has in particular classes of financial instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of conditions established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company, upon extension of credit is based on
management's credit evaluation of the borrower. Collateral obtained varies but
may include real estate, stocks, bonds, and certificates of deposit.

Unfunded commitments under lines of credit are commitments for possible future
extensions of credit to existing customers. These lines of credit usually do not
contain a specified maturity date and may not be drawn upon to the total extent
to which the Bank is committed.

Stand-by letters of credit are conditional lending commitments issued by the
Bank to guarantee the performance of a customer to a third party. Those letters
of credit are primarily issued to support public and private borrowing
arrangements. Essentially all letters of credit issued have expiration dates
within one year. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.

--------------------------------------------------------------------------------

                                       - 68 -
<PAGE>

Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
--------------------------------------------------------------------------------

NOTE L - COMMITMENTS AND CONTINGENCIES (Continued)

A summary of the contract amount of the Bank's exposure to off-balance sheet
credit risk as of December 31, 2008 is as follows (dollars in thousands):

Financial instruments whose contract amounts represent credit risk:

          Commitments to extend credit                         $  98,463
          Undisbursed lines of credit                             21,495
          Financial stand-by letters of credit                       874
          Performance stand-by letters of credit                   2,066

NOTE M - FAIR VALUE MEASUREMENTS

As discussed in Note A to the consolidated financial statements, the Company
adopted SFAS No. 157 and SFAS No. 159 on January 1, 2008. SFAS No. 157 defines
fair value, establishes a framework for measuring fair value under GAAP and
expands disclosures about fair value measurements. SFAS No. 157 applies whenever
other accounting pronouncements require or permit assets or liabilities to be
measured at fair value. Accordingly, SFAS No. 157 does not expand the use of
fair value in any new circumstances. SFAS No. 159 provides companies with an
option to report selected financial assets and liabilities at fair value. As of
December 31, 2008, the Company had not elected to measure any financial assets
or liabilities using the fair value option under SFAS No. 159; therefore the
adoption of SFAS No. 159 had no effect on the Company's financial condition or
results of operations.

The Company records securities available for sale and derivative assets at fair
value on a recurring basis. Fair value is a market-based measurement and is
defined as the price that would be received to sell an asset, or paid to
transfer a liability, in an orderly transaction between market participants at
the measurement date. The transaction to sell the asset or transfer the
liability is a hypothetical transaction at the measurement date, considered from
the perspective of a market participant that holds the assets or owes the
liability. In general, the transaction price will equal the exit price and,
therefore, represent the fair value of the asset or liability at initial
recognition. In determining whether a transaction price represents the fair
value of the asset or liability at initial recognition, each reporting entity is
required to consider factors specific to the transaction and the asset or
liability, the principal or most advantageous market for the asset or liability,
and market participants with whom the entity would transact in the market.

SFAS No. 157 establishes a fair value hierarchy to prioritize the inputs of
valuation techniques used to measure fair value. The inputs are evaluated and an
overall level for the fair value measurement is determined. This overall level
is an indication of how market-observable the fair value measurement is and
defines the level of disclosure. SFAS No. 157 clarifies fair value in terms of
the price in an orderly transaction between market participants to sell an asset
or transfer a liability in the principal (or most advantageous) market for the
asset or liability at the measurement date (an exit price). In order to
determine the fair value or the exit price, entities must determine the unit of
account, highest and best use, principal market, and market participants. These
determinations allow the reporting entity to define the inputs for fair value
and level of hierarchy.

Outlined below is the application of the fair value hierarchy established by
SFAS No. 157 to the Company's financial assets that are carried at fair value.

Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets. An active market for the
asset or liability is a market in which the transactions for the asset or
liability occur with sufficient frequency and volume to provide pricing
information on an ongoing basis. As of December 31, 2008, the Company did not
carry any financial assets and liabilities at fair value hierarchy Level 1.

Level 2 - inputs to the valuation methodology include quoted prices for similar
assets and liabilities in active markets, and inputs that are observable for the
asset or liability, either directly or indirectly, for substantially the full
term of the financial instrument. As of December 31, 2008, the types of
financial assets and liabilities the Company carried at fair value hierarchy
Level 2 included securities available for sale and derivatives.

--------------------------------------------------------------------------------

                                       - 69 -
<PAGE>

Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
--------------------------------------------------------------------------------

NOTE M - FAIR VALUE MEASUREMENTS (Continued)

Level 3 - inputs to the valuation methodology are unobservable and significant
to the fair value measurement. Unobservable inputs are supported by little or no
market activity or by the entity's own assumptions. As of December 31, 2008,
while the Company did not carry any financial assets or liabilities, measured on
a recurring basis, at fair value hierarchy Level 3, the Company did value
certain financial assets, measured on a non-recurring basis, at fair value
hierarchy Level 3.

Fair Value on a Recurring Basis. The Company measures certain assets at fair
value on a recurring basis, as described below.

Investment Securities Available for Sale
Investment securities available-for-sale are recorded at fair value on a
recurring basis. Fair value measurement is based upon quoted prices, if
available. If quoted prices are not available, fair values are measured using
independent pricing models or other model-based valuation techniques such as the
present value of future cash flows, adjusted for the security's credit rating,
prepayment assumptions and other factors such as credit loss assumptions. Level
1 securities include those traded on an active exchange, such as the New York
Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers
in active over-the-counter markets and money market funds. Level 2 securities
include mortgage-backed securities issued by government sponsored entities,
municipal bonds and corporate debt securities. Securities classified as Level 3
include asset-backed securities in less liquid markets.

Derivative Assets and Liabilities
Derivative instruments held or issued by the Company for risk management
purposes are traded in over-the-counter markets where quoted market prices are
not readily available. For those derivatives, the Company measures fair value
using models that use primarily market observable inputs, such as yield curves
and option volatilities, and include the value associated with counterparty
credit risk. The Company classifies derivatives instruments held or issued for
risk management purposes as Level 2. As of December 31, 2008 the Company had no
derivative assets or liabilities.

The Company utilizes valuation techniques that maximize the use of observable
inputs and minimize the use of unobservable inputs.

Fair Value on a Recurring Basis. Below is a table that presents information
about assets measured at fair value on a recurring basis at December 31, 2008:

<TABLE>
<S>                   <C>              <C>               <C>                <C>               <C>
                                                                      Fair Value Measurements at
                                                                       December 31, 2008, Using
                                                         ----------------------------------------------------
                      Total Carrying                       Quoted Prices      Significant
                       Amount in The        Assets           in Active           Other          Significant
                       Consolidated    Measured at Fair     Markets for        Observable      Unobservable
                       Balance Sheet        Value        Identical Assets        Inputs           Inputs
Description             12/31/2008        12/31/2008         (Level 1)         (Level 2)         (Level 3)
-------------------------------------  ----------------  -----------------  ----------------  ---------------

Available-for-sale
  securities          $       171,991  $        171,991  $           4,256  $        167,735  $             -
</TABLE>


--------------------------------------------------------------------------------

Fair Value on a Nonrecurring Basis. The Company measures certain assets at fair
value on a nonrecurring basis, as described below.

                                       - 70 -
<PAGE>

Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
--------------------------------------------------------------------------------


NOTE M - FAIR VALUE MEASUREMENTS (Continued)

Loans Held for Sale
Loans held for sale are carried at the lower of cost or market value. The fair
value of loans held for sale is based on what secondary markets are currently
offering for portfolios with similar characteristics. As such, the Company
classifies loans subjected to nonrecurring fair value adjustments as Level 2.
There were no loans held for sale at December 31, 2008 and no fair value
adjustments related to loans held for sale at as of or for the year ended
December 31, 2008.

Loans
The Company does not record loans at fair value on a recurring basis. However,
from time to time, a loan is considered impaired and an allowance for loan
losses is established. Loans for which it is probable that payment of interest
and principal will not be made in accordance with the contractual terms of the
loan agreement are considered impaired. Once a loan is identified as
individually impaired, management measures impairment in accordance with SFAS
No. 114, "Accounting by Creditors for Impairment of a Loan." The fair value of
impaired loans is estimated using one of several methods, including collateral
value, market value of similar debt, enterprise value, liquidation value and
discounted cash flows. Those impaired loans not requiring an allowance represent
loans for which the fair value of the expected repayments or collateral exceed
the recorded investments in such loans. At December 31, 2008, substantially all
of the total impaired loans were evaluated based on the fair value of the
collateral. In accordance with SFAS No. 157, impaired loans where an allowance
is established based on the fair value of collateral require classification in
the fair value hierarchy. When the fair value of the collateral is based on an
observable market price or a current appraised value, the Company records the
impaired loan as nonrecurring Level 2. When current appraised value is not
available or management determines the fair value of the collateral is further
impaired below the appraised value and there is no observable market price, the
Company records the impaired loan as nonrecurring Level 3. Impaired loans
totaled $20.8 million at December 31, 2008. Of such loans, $17.0 million had
specific loss allowances aggregating $2.9 million at that date. Of those
specific allowances, all were determined using Level 3 inputs.

Goodwill and Other Intangible Assets
Goodwill and identified intangible assets are subject to impairment testing.
When appropriate, a projected cash flow valuation method is used in the
completion of impairment testing. This valuation method requires a significant
degree of management judgment. In the event the projected undiscounted net
operating cash flows are less than the carrying value, the asset is recorded at
fair value as determined by the valuation model. As such, the Company classifies
goodwill and other intangible assets subjected to nonrecurring fair value
adjustments as Level 3. At December 31, 2008 there were no fair value
adjustments related to goodwill of $6.1 million and other intangible assets of
$449,000.

Foreclosed Assets
Foreclosed assets are adjusted to fair value upon transfer of the loans to
foreclosed assets. Subsequently, foreclosed assets are carried at the lower of
carrying value or fair value. Fair value is based upon independent market
prices, appraised values of the collateral or management's estimation of the
value of the collateral. When the fair value of the collateral is based on an
observable market price or a current appraised value, the Company records the
foreclosed asset as nonrecurring Level 2. When an appraised value is not
available or management determines the fair value of the collateral is further
impaired below the appraised value and there is no observable market price, the
Company records the foreclosed asset as nonrecurring Level 3. At December 31,
2008 there were no fair value adjustments related to foreclosed real estate of
$1.6 million.

--------------------------------------------------------------------------------

                                       - 71 -
<PAGE>

Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
--------------------------------------------------------------------------------

NOTE N - STOCK OPTION PLAN

The Company has a non-qualified stock option plan for certain key employees
under which it is authorized to issue options for up to 1,342,773 shares of
common stock. Options are granted at the discretion of the Company's Board of
Directors at an exercise price approximating market value, as determined by a
committee of Board members. All options granted subsequent to a 1997 amendment
will be 100% vested one year from the grant date and will expire after such a
period as is determined by the Board at the time of grant. Options granted prior
to the amendment have ten year lives and a five year level vesting provision.

A summary of option activity under the Plan for the year ended December 31,
2008, is presented below:
<TABLE>
<S>                                        <C>      <C>                 <C>  <C>

                                                                 Weighted-
                                                                  Average
                                                      Option     Remaining   Aggregate
                                                     Price Per   Contractual Intrinsic
                                          Shares       Share        Term       Value
                                       ------------ ----------- ------------ ----------

Outstanding at January 1, 2008             166,028  $     16.20

  Granted                                  175,944        12.30
  Exercised                                (50,470)       10.44
  Forfeited                                 (1,376)       16.73
  Expired                                     (657)       10.24
                                       ------------

Balance December 31, 2008                  289,469  $     14.84         2.93 $        -
                                       ============ =========== ============ ==========

Excercisable at December 31, 2008          237,144  $     14.69         2.27 $        -
                                       ============ =========== ============ ==========
</TABLE>

The weighted average exercise price of all exercisable options at December 31,
2008 is $14.69. There were 366,946 shares reserved for future issuance at
December 31, 2008.

As of December 31, 2008, there was $14,000 of unrecognized compensation cost
related to non-vested share-based compensation arrangements.

--------------------------------------------------------------------------------

                                       - 72 -
<PAGE>

Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
--------------------------------------------------------------------------------

NOTE N - STOCK OPTION PLAN (Continued)

Additional information concerning the Company's stock options at December 31,
2008 is as follows:

                                                      Remaining
Exercise                                  Number     Contractual      Number
  Price                                 Outstanding      Life       Exercisable
--------                                -----------  ------------  -------------

  $10.92                                    116,001          4.64        116,001
  $13.24                                     36,141          0.15         36,141
  $15.55                                     52,325          3.15              -
  $16.73                                     43,863          1.14         43,863
  $24.41                                     41,140          2.16         41,140
                                        -----------  ------------  -------------
                                            289,469          2.93        237,144
                                        ===========                =============

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions used for
grants in 2008, 2007, and 2006:


                                               2008        2007        2006
                                            ----------  ----------  -----------

Dividend yield                                   1.80%       1.20%        1.53%
Expected volatility                             28.21%      23.76%       20.72%
Risk free interest rate                          2.82%       4.65%        4.73%
Expected life                                  5 years     4 years      4 years

The weighted average fair value of options granted during 2008, 2007 and 2006
was $2.97, $5.76, and $3.84, respectively.

NOTE O - OTHER EMPLOYEE BENEFITS

Supplemental Retirement

In 1998, the Company's subsidiary, Four Oaks Bank & Trust Company, adopted a
Supplemental Executive Retirement Plan ("SERP") for its president. The Company
has purchased life insurance policies in order to provide future funding of
benefit payments. SERP benefits will accrue and vest during the period of
employment and will be paid in annual benefit payments over the officer's
remaining life commencing with the officer's retirement. The liability accrued
under the SERP plan amounts to $207,000 and $175,000 at December 31, 2008 and
2007, respectively. During 2008, 2007, and 2006, the expense attributable to the
SERP amounted to $32,000, $28,000, and $25,000, respectively.

Employment Agreements

The Company has entered into employment agreements with certain of its executive
officers to ensure a stable and competent management base. The agreements
provide for benefits as spelled out in the contracts and cannot be terminated by
the Company's Board of Directors, except for cause, without prejudicing the
officers' rights to receive certain vested rights, including compensation. In
addition, the Company has entered into severance compensation agreements with
certain of its executive officers and key employees to provide them with
severance pay benefits in the event of a change in control of the Company, as
outlined in the agreements; the acquirer will be bound to the terms of the
contracts.

--------------------------------------------------------------------------------

                                       - 73 -
<PAGE>

Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
--------------------------------------------------------------------------------

NOTE O - OTHER EMPLOYEE BENEFITS (Continued)

Defined Contribution Plan

The Company sponsors a contributory profit-sharing plan in effect for
substantially all employees. Participants may make voluntary contributions
resulting in salary deferrals in accordance with Section 401(k) of the Internal
Revenue Code. The plans provide for employee contributions up to $15,500 of the
participant's annual salary and an employer contribution of 25% matching of the
first 6% of pre-tax salary contributed by each participant. Expenses related to
these plans for the years ended December 31, 2008, 2007 and 2006 were $149,000,
$97,000, and $66,000, respectively. Contributions under the plan are made at the
discretion of the Company's Board of Directors.

Employee Stock Ownership Plan

The Company sponsors an employee stock ownership plan (ESOP) which makes the
employees of the Company, owners of stock in the Company. The Four Oaks Bank &
Trust Company's Employee Stock Ownership Trust is available to full-time
employees at least 21 years of age after six months of service. Contributions
are voluntary by the Company and employees cannot contribute. Stock issued is
purchased on the open market and the Company does not issue new shares in
conjunction with this plan. Voluntary contributions are determined by the
Company's Board of Directors annually based on Company performance and are
allocated to employees based on annual compensation. Contribution expenses for
this plan for the years ended 2008, 2007, and 2006 were $331,000, $300,000, and
$249,000, respectively.

Employee Stock Purchase and Bonus Plan

The Employee Stock Purchase and Bonus Plan (the "Purchase Plan") is a voluntary
plan that enables full-time employees of the Company and its subsidiaries to
purchase shares of the Company's common stock. The Purchase Plan is administered
by a committee of the Board of Directors, which has broad discretionary
authority to administer the Purchase Plan. The Company's Board of Directors may
amend or terminate the Purchase Plan at any time. The Purchase Plan is not
intended to be qualified as an employee stock purchase plan under Section 423 of
the Internal Revenue Code of 1986, as amended.

Once a year, participants in the Purchase Plan purchase the Company's common
stock at fair market value. Participants are permitted to purchase shares under
the Purchase Plan up to (5%) of their compensation, with a maximum purchase
amount of $1,000 per year. The Company matches, in cash, fifty percent (50%) of
the amount of each participant's purchase, up to $500. After withholding for
income and employment taxes, participants use the balance of the Company's
matching grant to purchase shares of the Company's common stock.

As of December 31, 2008, 268,544 shares of the Company's common stock had been
reserved for issuance under the Purchase Plan, and 180,016 shares had been
purchased. During the years ended December 31, 2008 and 2007, 9,628 and 5,785
shares, respectively, were purchased under the Purchase Plan.

--------------------------------------------------------------------------------

                                       - 74 -
<PAGE>

Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
--------------------------------------------------------------------------------

NOTE P - LEASES

The Company has entered into non-cancelable operating leases for four branch
facilities. Future minimum lease payments under the leases for future years are
as follows (amounts in thousands):

       2009                                                   $      187
       2010                                                          169
       2011                                                          173
       2012                                                          178
       2013                                                          125
       2014 and beyond                                               257
                                                              ----------

                                                              $    1,089
                                                              ==========

In addition, the Company has leased a building from one of its former directors
for approximately $1,000 per month in 2008 and 2007, under an operating lease on
a month-to-month basis.

Total rental expense under operating leases for the years ended December 31,
2008, 2007 and 2006 amounted to $192,000, $152,000, and $116,000 respectively.


NOTE Q- PARENT COMPANY FINANCIAL INFORMATION

Condensed financial information of Four Oaks Fincorp, Inc. at December 31, 2008
and 2007 and for the years ended December 31, 2008, 2007 and 2006 is presented
below:

                                                      2008            2007
                                                 --------------  --------------
                                                     (Amounts in thousands)
Condensed Balance Sheets

Assets:
Cash and cash equivalents                        $          993  $        3,686
Equity investment in subsidiaries                        74,687          62,187
Securities available for sale                             3,189           1,153
Other assets                                                183              33
                                                 --------------  --------------
    Total assets                                 $       79,052  $       67,059
                                                 ==============  ==============

Liabilities and Shareholders' Equity:
Other liabilities                                $           30  $           57
Subordinated debentures                                  12,372          12,372

Shareholders' equity                                     66,650          54,630
                                                 --------------  --------------

    Total liabilities and shareholders' equity   $       79,052  $       67,059
                                                 ==============  ==============

<TABLE>
<S>                                               <C>        <C>         <C>
                                                  For the Years Ended December 31,
                                                  --------------------------------
                                                    2008        2007       2006
                                                  ---------  ----------  ---------
                                                       (Amounts in thousands)
Condensed Statements of Operations

Dividends received from bank subsidiary           $  2,183   $   1,784   $  1,448
Equity in undistributed earnings of subsidiaries     2,514       4,464      6,021
Interest income                                        113         228        187
Other income                                           105          83         65
Other expenses                                        (684)       (907)      (704)
                                                  ---------  ----------  ---------

    Net income                                    $  4,231   $   5,652   $  7,017
</TABLE>
--------------------------------------------------------------------------------

                                       - 75 -
<PAGE>

Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
--------------------------------------------------------------------------------

NOTE Q - PARENT COMPANY FINANCIAL INFORMATION (Continued)
<TABLE>
<S>                                                            <C>           <C>           <C>
                                                                   2008          2007         2006
                                                               ------------  ------------  -----------
                                                                       (Amounts in thousands)
Condensed Statements of Cash Flows

Operating activities:
   Net income                                                  $     4,231   $     5,652   $    7,017
   Equity in undistributed earnings of subsidiaries                 (2,514)       (4,464)      (6,021)
   Decrease (increase) in other assets                                (150)           43          (76)
   (Decrease) increase in other liabilities                            (27)          (72)          17
                                                               ------------  ------------  -----------
    Net cash provided by operating activities                        1,540         1,159          937
                                                               ------------  ------------  -----------

Investing activities:
   Investment in subsidiaries                                       (9,845)         (315)     (12,695)
   Purchase of securities available for sale                        (2,036)         (138)        (347)
   Proceeds from reclamation of equity in FOMC Partnership               -             -            -
                                                               ------------  ------------  -----------
     Net cash used by investing activities                         (11,881)         (453)     (13,042)
                                                               ------------  ------------  -----------

Financing activities:
   Proceeds from issuance of common stock                            1,859         1,665        1,609
   Effect of merger with LongLeaf Community Bank                     7,945             -            -
   Excess tax benefits from stock options                              102           203          293
   Proceeds from issuance of subordinated debentures                                   -       12,372
   Purchases and retirements of common stock                           (75)       (1,513)        (252)
   Dividends paid to shareholders                                   (2,183)       (1,784)      (1,448)
                                                               ------------  ------------  -----------
     Net cash (used) provided by financing activities                7,648        (1,429)      12,574
                                                               ------------  ------------  -----------

     Net (decrease) increase in cash and cash equivalents           (2,693)         (723)         469

Cash and cash equivalents, beginning of year                         3,686         4,409        3,940
                                                               ------------  ------------  -----------

Cash and cash equivalents, end of year                         $       993   $     3,686   $    4,409
                                                               ============  ============  ===========
</TABLE>

NOTE R - FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires
the disclosure of estimated fair values for financial instruments. Quoted market
prices, if available, are utilized as an estimate of the fair value of financial
instruments. Because no quoted market prices exist for a significant part of the
Company's financial instruments, the fair value of such instruments has been
derived based on management's assumptions with respect to future economic
conditions, the amount and timing of future cash flows and estimated discount
rates. Different assumptions could significantly affect these estimates.
Accordingly, the net realizable value could be materially different from the
estimates presented below. In addition, the estimates are only indicative of
individual financial instruments' values and should not be considered an
indication of the fair value of the Company taken as a whole. The following
methods and assumptions were used to estimate the fair value of each class of
financial instrument.

--------------------------------------------------------------------------------

                                       - 76 -
<PAGE>

Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
--------------------------------------------------------------------------------

NOTE R - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

Cash and Cash Equivalents

The carrying amounts of cash and cash equivalents are equal to the fair value
due to the liquid nature of the financial instruments.

Investment Securities Available for Sale

Fair values of investment securities available for sale are based on quoted
market prices. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.

Loans

Fair values have been estimated by type of loan: residential real estate loans,
consumer loans, and commercial and other loans. For variable-rate loans that
reprice frequently and with no significant credit risk, fair values are based on
carrying values. The fair values of fixed rate loans are estimated by
discounting the future cash flows using the current rates at which loans with
similar terms would be made to borrowers with similar credit ratings and for the
same remaining maturities, adjusted for current liquidity and market conditions.
The Company has assigned no fair value to off-balance sheet financial
instruments since they are either short term in nature or subject to immediate
repricing.

FHLB Stock

The carrying amount of FHLB stock approximates fair value.

Investment in Life Insurance

The carrying value of life insurance approximates fair value because this
investment is carried at cash surrender value, as determined by the insurer.

Deposits

The fair value of demand deposits, savings accounts, and money market deposits
is the amount payable on demand at year-end. Fair value of time deposits is
estimated by discounting the future cash flows using the current rate offered
for similar deposits with the same maturities.

Borrowings and Subordinated Debentures

The fair values are based on discounting expected cash flows at the interest
rate for debt with the same or similar remaining maturities and collection
requirements.

Accrued Interest Receivable and Payable

The carrying amounts of accrued interest approximate fair value.

--------------------------------------------------------------------------------

                                       - 77 -
<PAGE>

Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
--------------------------------------------------------------------------------

NOTE R - FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)

Derivative Financial Instruments

Fair values for interest rate swap agreements are based upon the amounts
required to settle the contracts.

The following table presents information for financial assets and liabilities as
of December 31, 2008 and 2007:

<TABLE>
<S>                                       <C>         <C>          <C>          <C>
                                                   2008                     2007
                                          -----------------------  -----------------------
                                           Carrying    Estimated    Carrying    Estimated
                                            Value     Fair Value      Value     Fair Value
                                          ----------  -----------  -----------  ----------
Financial assets:
Cash and cash equivalents                 $   28,875  $    28,875  $    18,275  $   18,275
Securities available for sale                171,991      171,991      114,301     114,301
Loans, net                                   671,958      666,558      538,617     537,831
FHLB stock                                     6,529        6,529        5,010       5,010
Investment in life insurance                  10,566       10,566       10,041      10,041
Accrued interest receivable                    4,216        4,216        3,564       3,564

Financial liabilities:
Deposits                                  $  722,693  $   715,581  $   537,763  $  522,212
Subordinated debentures                       12,372       11,773       12,372      12,381
Borrowings                                   114,314      117,042       97,000      99,905
Accrued interest payable                       3,282        3,282        4,055       4,055

Derivative financial instruments:
Interest rate swap agreements:
    Liabilities, net loss                          -            -           80          80
</TABLE>

NOTE S - CASH FLOW SUPPLEMENTAL DISCLOSURES

The following information is supplemental information regarding the cash flows
for the years ended December 31, 2008, 2007 and 2006:

<TABLE>
<S>                                                                     <C>             <C>           <C>
                                                                             2008           2007          2006
                                                                        --------------- ------------  -------------
                                                                           (Amounts in thousands)
Cash paid for:
  Interest on deposits and borrowings                                   $      19,152   $     22,902  $      16,814
  Income taxes                                                                  2,188          2,981          4,057

Summary of noncash investing and financing activities:
  Transfer from loans to foreclosed assets                                        273          2,570            269

  Increase (decrease) in fair value of securities available for sale,
     net of tax                                                                   (33)           613            161

  Increase (decrease) in fair value of cash flow hedge, net of tax                  -            242            187
</TABLE>

NOTE T - STOCK PURCHASE PLAN

On November 26, 2007 the Board of Directors increased the purchase authorization
to 500,000 shares and on December 22, 2008 authorized the extension of the
Company's Stock Purchase Program through December 31, 2009. During 2008, the
Company purchased 6,020 shares at an average cost of $12.49. At December 31,
2008, there were 344,949 shares available for repurchase.

--------------------------------------------------------------------------------

                                       - 78 -
<PAGE>

Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
--------------------------------------------------------------------------------

NOTE U - MERGER WITH LONGLEAF COMMUNITY BANK

On April 17, 2008, the Company completed the merger with LongLeaf Community Bank
("LongLeaf"), headquartered in Rockingham, North Carolina. Under the terms of
the merger agreement, each share of LongLeaf common stock was converted into the
right to receive either (i) $16.50 in cash, without interest, (ii) 1.0 share of
the Company's common stock multiplied by an exchange ratio of 1.1542825 or (iii)
0.60 shares of the Company's common stock multiplied by an exchange ratio of
1.1542825 plus an amount equal to $6.60 in cash. As a result of the acquisition,
the Company paid $4.9 million in cash and issued 609,770 additional shares of
common stock. The acquisition was accounted for using the purchase method of
accounting, with the operating results of LongLeaf subsequent to April 17, 2008
included in the Company's financial statements.

A summary of the total purchase price of the transaction is as follows:

                                                        (In thousands)
Fair value of common stock issued                      $          7,554
Fair value of common stock options issued                           390
Cash paid for shares                                              4,265
Transaction costs paid in cash                                      606
                                                       -----------------
     Total purchase price                              $         12,815
                                                       =================

A summary of the fair value of the assets acquired and liabilities assumed is as
follows:

                                                        (In thousands)
Cash and due from banks                                $          1,690
Interest-earning deposits                                         1,763
Federal funds sold                                                4,585
Investment securities available for sale                          4,212
Loans, net                                                       47,248
Accrued interest receivable                                         242
FHLB stock                                                          279
Bank premises and equipment                                       3,678
Deferred tax assets, net                                            886
Core deposit intangible                                             470
Goodwill                                                          6,083
Other assets                                                        139
Deposits                                                        (54,514)
FHLB Advances                                                    (2,586)
Accrued interest payable                                           (105)
Other liabilities                                                (1,255)
                                                       -----------------
    Net assets acquired                                $         12,815
                                                       =================

--------------------------------------------------------------------------------

                                       - 79 -
<PAGE>

Four Oaks Fincorp, Inc.
Notes to Consolidated Financial Statements
December 31, 2008, 2007 and 2006
--------------------------------------------------------------------------------

NOTE V - RECENT DEVELOPMENTS WITH THE U.S. TREASURY


The U.S. Treasury has announced that it will make funds available to certain
banks under the Capital Purchase Program (the "Program"). The Emergency Economic
Stabilization Act of 2008 authorized the Treasury to establish the Program under
which certain United States financial institutions may sell senior preferred
stock and issue warrants to purchase an institution's common stock to the
Treasury in exchange for a capital infusion. Under the Program, eligible
institutions can generally apply to issue preferred stock to the Treasury in
aggregate amounts between 1% and 3% of the institution's risk-weighted assets,
along with warrants covering shares of common stock. On November 5, 2008, the
Company's board of directors (the "Board") authorized and approved the Company's
participation in the Program, and the Company filed its application with the
Treasury in November 2008 to participate in the Program. In order to participate
in the Program, the Company's shareholders approved an amendment to the
Compan's Articles of Incorporation to authorize preferred stock, and the Board
authorized the Company to sell up to 20,000 shares of senior preferred stock
("Senior Preferred") to the Treasury for $1,000 per share. As of the filing date
of this report, we are currently waiting to hear about the status of our
application.

Accordingly, there is no binding agreement or commitment with respect to the
Company's participation in the Program. The Company and the Treasury must still
negotiate the terms and conditions of the Company's participation in the
Program, which means that closing of the transaction is not guaranteed. Although
the Company has no reason to believe that the Company will not be able to
participate in the Program, no assurances can be given that the Company will be
able to participate in the Program, and the approximate number of shares of
preferred stock that the Company may issue pursuant to the Program or the
approximate amount of consideration the Company will receive as compensation
from the Treasury for any such shares that may be issued by the Company under
the Program cannot be determined at this time.

--------------------------------------------------------------------------------

                                       - 80 -
<PAGE>

Item 9 - Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.

         Not Applicable.

Item 9A - Controls and Procedures.

Disclosure Controls and Procedures

As required by paragraph (b) of Rule 13a-15 under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), an evaluation was carried out under the
supervision and with the participation of the Company's management, including
its Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the Company's disclosure controls and procedures (as defined in Rule 13a-15(e)
and 15d-15(e) under the Exchange Act) as of the end of the period covered by
this Annual Report. As defined in Rule 13a-15(e) and 15d-15(e) under the
Exchange Act, the term disclosure controls and procedures means controls and
other procedures of an issuer that are designed to ensure that information
required to be disclosed by the issuer in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the Securities and Exchange Commission's (the
"SEC's") rules and forms. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information required
to be disclosed by an issuer in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the issuer's management,
including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding
required disclosure. Based on their evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that as of the end of the period covered
by this Annual Report, the Company's disclosure controls and procedures are
effective, in that they provide reasonable assurances that information required
to be disclosed by the Company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods required by the SEC's rules and forms.

Management's Report on Internal Control Over Financial Reporting

         Management of Four Oaks Fincorp, Inc. (the "Company") is responsible
for establishing and maintaining effective internal control over financial
reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934. Internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting principles.

         Under the supervision and with the participation of management,
including the principal executive officer and principal financial officer, the
Company conducted an evaluation of the effectiveness of internal control over
financial reporting, based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this evaluation under the framework in Internal Control -
Integrated Framework, management of the Company has concluded the Company
maintained effective internal control over financial reporting as of December
31, 2008.

         Internal control over financial reporting cannot provide absolute
assurance of achieving financial reporting objectives because of its inherent
limitations. Internal control over financial reporting is a process that
involves human diligence and compliance and is subject to lapses in judgment and
breakdowns resulting from human failures. Internal control over financial
reporting can also be circumvented by collusion or improper management override.
Because of such limitations, there is a risk that material misstatements may not
be prevented or detected on a timely basis by internal control over financial
reporting. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

         Management is also responsible for compliance with laws and regulations
relating to safety and soundness which are designated by the FDIC and the
appropriate federal banking agency. Management assessed its compliance with
these designated laws and regulations relating to safety and soundness and
believes that the Company complied, in all significant respects, with such laws
and during the year ended December 31, 2008.

         Dixon Hughes PLLC, an independent, registered public accounting firm,
has audited the Company's consolidated financial statements as of and for the
year ended December 31, 2008 included in this annual report, and has issued an
attestation report on management's assessment of the effectiveness of the
Company's internal control over financial reporting as of December 31, 2008,
which is included herein. This report appears on page 83.

Changes in Internal Control Over Financial Reporting

         There have been no changes in the Company's internal control over
financial reporting (as such term is defined in Rules 13d-15(f) and 15d-15(f)
under the Exchange Act) that occurred during the fourth quarter of 2008 that the
Company believes have materially affected or is likely to materially affect, its
internal control over financial reporting.

--------------------------------------------------------------------------------

                                       - 81 -
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Four Oaks Fincorp, Inc. and Subsidiaries

         We have audited Four Oaks Fincorp, Inc. and Subsidiaries (the
"Company")'s internal control over financial reporting as of December 31, 2008
based on criteria established in Internal Control--Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission. The
Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management's
Report on Internal Control Over Financial Reporting. Our responsibility is to
express an opinion on the Company's internal control over financial reporting
based on our audit.

         We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included performing
such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.

         A company's internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

         Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.

         In our opinion, Four Oaks Fincorp, Inc. and Subsidiaries maintained, in
all material respects, effective internal control over financial reporting as of
December 31, 2008, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.

         We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated financial
statements of Four Oaks Fincorp, Inc. and Subsidiaries as of and for the year
ended December 31, 2008, and our report dated March 12, 2009, expressed an
unqualified opinion on those consolidated financial statements.

         We do not express an opinion or any other form of assurance on
management's statement referring to compliance with designated laws and
regulations related to safety and soundness.

/s/ Dixon Hughes PLLC

Raleigh, North Carolina
March 12, 2009

--------------------------------------------------------------------------------

                                       - 82 -
<PAGE>

Item 9B - Other Information.
         Not Applicable.

                                    PART III

         This Part incorporates certain information from the definitive proxy
statement (the "2009 Proxy Statement") for the Company's 2009 Annual Meeting of
Shareholders, to be filed with the SEC within 120 days after the end of the
Company's fiscal year.

Item 10 - Directors, Executive Officers and Corporate Governance.

         Director information is incorporated by reference from the sections
entitled "Information about Our Board of Directors," "Election of Directors,"
and under the section entitled "Section 16(a) Beneficial Ownership Reporting
Compliance," in the 2009 Proxy Statement. Information on our executive officers
is included under the caption "Executive Officers of the Registrant" on Page 11
of this report. Information about our Code of Ethics is incorporated by
reference from the section entitled "Code of Ethics," in the 2009 Proxy
Statement. Information about the procedures by which shareholder nominations to
our board of directors may be submitted, including material changes to such
procedures, if any, is incorporated by reference from the section entitled
"Information About our Board of Directors-- Board Committees--The Corporate
Governance and Nominating Committee" in the 2009 Proxy Statement. Information
regarding the Company's audit committee is hereby incorporated by reference from
the section entitled "Information About our Board of Directors--Board
Committees--The Audit Committee" in the 2009 Proxy Statement.

Item 11 - Executive Compensation.

         This information is incorporated by reference from the section entitled
"Executive Compensation" and "Compensation Committee Interlocks and Insider
Participation" in the 2009 Proxy Statement.


Item 12 - Security Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters.

         This information is incorporated by reference from the section entitled
"Security Ownership of Management and Certain Beneficial Owners" and the
sections entitled "Equity Compensation Plan Information," "Nonqualified Stock
Option Plan" and "Employee Stock Purchase and Bonus Plan" in the 2009 Proxy
Statement.

         The following table sets forth equity compensation plan information at
December 31, 2008.

<TABLE>
<S>                                                        <C>                     <C>                       <C>
                                        Equity Compensation Plan Information
--------------------------------------------------------------------------------------------------------------------
                                                                                            Number of securities
                                                                                           remaining available for
                                              Number of securities                          future issuance under
                                                to be issued up      Weighted-average     equity compensation plans
                                                  exercise of        exercise price of      (excluding securities
Plan Category                                 outstanding options   outstanding options   reflected in column (a))
--------------------------------------------------------------------------------------------------------------------
                                                      (a)                   (b)                      (c)
--------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved by
security holders
--------------------------------------------------------------------------------------------------------------------
Stock Option Plans                                         289,469                 $14.84                    366,946
--------------------------------------------------------------------------------------------------------------------
Employee Stock Purchase Plan                                     -                      -                    268,544
--------------------------------------------------------------------------------------------------------------------
Equity compensation plans not approved by
security holders                                               N/A                    N/A                        N/A
--------------------------------------------------------------------------------------------------------------------
Total                                                      289,469                 $14.84                    635,490
--------------------------------------------------------------------------------------------------------------------
</TABLE>

Item 13 - Certain Relationships and Related Transactions, and Director
Independence.

Information about certain relationships and related transactions is incorporated
by reference from the section entitled "Certain Transactions" in the 2009 Proxy
Statement. Information about director independence is incorporated by reference
from the section entitled "Information About our Board of Directors-General" in
the 2009 Proxy Statement.


Item 14 - Principal Accountant Fees and Services

Information regarding principal accountant fees and services is incorporated by
reference from the section entitled "Audit Firm Fee Summary" in the 2009 Proxy
Statement.


--------------------------------------------------------------------------------

                                       - 83 -
<PAGE>

Item 15 - Exhibits, Financial Statement Schedules.

     (a)(1) Financial Statements. The following financial statements and
supplementary data are included in Item 8 of Part II of this Annual Report on
Form 10-K.

Financial Statements                                            Form 10-K Page
                                                                --------------
Report of Independent Registered Public Accounting Firm, Dixon
 Hughes PLLC, dated March 12, 2009                                          45
Consolidated Balance Sheets as of December 31, 2008 and 2007                46
Consolidated Statements of Operations for the years ended
 December 31, 2008, 2007 and 2006                                           47
Consolidated Statements of Comprehensive Income for the years
 ended December 31, 2008, 2007 and 2006                                     48
Consolidated Statements of Shareholders' Equity for the years
 ended December 31, 2008, 2007 and 2006                                     49
Consolidated Statements of Cash Flows for the years ended
 December 31, 2008, 2007 and 2006                                           50
Notes to Consolidated Financial Statements                                  51

     (a)(2) Financial Statement Schedules. All applicable financial statement
schedules required under Regulation S-X have been included in the Notes to
Consolidated Financial Statements.

     (a)(3) Exhibits. The following exhibits are filed as part of this Annual
Report on Form 10-K.

    Exhibit No.  Description of Exhibit
    -----------  ----------------------

    2.1          Merger Agreement, dated as of December 10, 2007, by and among
                 Four Oaks Fincorp, Inc., Four Oaks Bank & Trust Company and
                 LongLeaf Community Bank (incorporated by reference to Exhibit
                 2.1 to the Company's Current Report on Form 8-K filed on
                 December 13, 2007)
    2.2          List of Schedules Omitted from Merger Agreement included as
                 Exhibit 2.1 above (incorporated by reference to Exhibit 2.2 to
                 the Company's Current Report on Form 8-K filed on December 13,
                 2007)
    3.1          Articles of Incorporation of Four Oaks Fincorp, Inc. including
                 Articles of Amendment to Articles of Incorporation.
    3.2          Bylaws of Four Oaks Fincorp, Inc. (incorporated by reference to
                 Exhibit 3.2 to the Company's Current Report on Form 8-K12G3
                 filed with the SEC on July 2, 1997)
    4            Specimen of Certificate for Four Oaks Fincorp, Common Stock
                 (incorporated by reference to Exhibit 4 to the Company's
                 Current Report on Form 8-K12G3 filed with the SEC on July 2,
                 1997)
    10.1         Employment Agreement with Ayden R. Lee, Jr. (incorporated by
                 reference to Exhibit 10.1 to the Company's Quarterly Report on
                 Form 10-Q for the period ended June 30, 1997) (management
                 contract or compensatory plan, contract or arrangement)
    10.2         Severance Compensation Agreement with Ayden R. Lee, Jr.
                 (incorporated by reference to Exhibit 10.2 to the Company's
                 Quarterly Report on Form 10-Q for the period ended June 30,
                 1997) (management contract or compensatory plan, contract or
                 arrangement)
    10.3         Amended and Restated Nonqualified Stock Option Plan
                 (incorporated by reference to Exhibit 10.2 to the Company's
                 Quarterly Report on Form 10-Q for the period ended June 30,
                 2004) (management contract or compensatory plan, contract or
                 arrangement)

--------------------------------------------------------------------------------

                                       - 84 -
<PAGE>

    Exhibit No.  Description of Exhibit
    -----------  ----------------------

    10.4         Amended and Restated Employee Stock Purchase and Bonus Plan
                 (incorporated by reference to Exhibit 10.1 to the Company's
                 Quarterly Report on Form 10-Q for the period ended June 30,
                 2004) (management contract or compensatory plan, contract or
                 arrangement)
    10.5         Second Amended and Restated Dividend Reinvestment and Stock
                 Purchase Plan (incorporated by reference to Exhibit 10.1 to
                 the Company's Current Report on Form 8-K filed with the SEC on
                 December 21, 2006) (management contract or compensatory plan,
                 contract or arrangement)
    10.6         Four Oaks Bank & Trust Company Supplemental Executive
                 Retirement Plan (incorporated by reference to Exhibit 10.6 to
                 the Company's Annual Report on Form 10-KSB for the fiscal year
                 ended December 31, 1998) (management contract or compensatory
                 plan, contract or arrangement)
    10.7         Employment Agreement with Clifton L. Painter (incorporated by
                 reference to Exhibit 10.7 to the Company's Annual Report on
                 Form 10-KSB for the fiscal year ended December 31, 2001)
                 (management contract or compensatory plan, contract or
                 arrangement)
    10.8         Severance Compensation Agreement with Clifton L. Painter
                 (incorporated by reference to Exhibit 10.8 to the Company's
                 Annual Report on Form 10-KSB for the period ended December 31,
                 2002) (management contract or compensatory plan, contract or
                 arrangement)
    10.9         Executive Employment Agreement with W. Leon Hiatt, III
                 (incorporated by reference to Exhibit 10.9 to the Company's
                 Annual Report on Form 10-KSB for the period ended December 31,
                 2003) (management contract or compensatory plan, contract or
                 arrangement)
    10.10        Severance Compensation Agreement with W. Leon Hiatt, III
                 (incorporated by reference to Exhibit 10.10 to the Company's
                 Annual Report on form 10-KSB for the period ended December 31,
                 2003) (management contract or compensatory plan, contract or
                 arrangement)
    10.11        Executive Employment Agreement with Nancy S. Wise (incorporated
                 by reference to Exhibit 10.11 to the Company's Annual Report
                 on Form 10-KSB for the period ended December 31, 2003)
                 (management contract or compensatory plan, contract or
                 arrangement)
    10.12        Severance Compensation Agreement with Nancy S. Wise
                 (incorporated by reference to Exhibit 10.12 to the Company's
                 Annual Report on Form 10-KSB for the period ended December 31,
                 2003) (management contract or compensatory plan, contract or
                 arrangement)
    10.13        Form of Stock Option Agreement (Non-Employee Director)
                 (incorporated by reference to Exhibit 10.1 to the Company's
                 Current Report on Form 8-K filed with the SEC on March 1,
                 2005) (management contract or compensatory plan, contract or
                 arrangement)
    10.14        Form of Stock Option Agreement (Employee) (incorporated by
                 reference to Exhibit 10.2 to the Company's Current Report on
                 Form 8-K filed with the SEC on March 1, 2005) (management
                 contract or compensatory plan, contract or arrangement)
    10.15        Executive Employment Agreement with Jeff D. Pope (incorporated
                 by reference to Exhibit 10.15 to the Company's Annual Report
                 on Form 10-K for the fiscal year ended December 31, 2004)
                 (management contract or compensatory plan, contract or
                 arrangement)
    10.16        Severance Compensation Agreement with Jeff D. Pope
                 (incorporated by reference to Exhibit 10.16 to the Company's
                 Annual Report on Form 10-K for the fiscal year ended December
                 31, 2004) (management contract or compensatory plan, contract
                 or arrangement)
    10.17        Summary of Non-Employee Director Compensation (incorporated by
                 reference to Exhibit 10.1 to the Company's Current Report on
                 Form 8-K filed with the SEC on January 25, 2006) (management
                 contract or compensatory plan, contract or arrangement)

--------------------------------------------------------------------------------

                                       - 85 -

<PAGE>

    Exhibit No.  Description of Exhibit
    -----------  ----------------------

    10.18        Amended and Restated Declaration of Trust of Four Oaks
                 Statutory Trust I, dated as of March 30, 2006 (incorporated by
                 reference to Exhibit 10.1 to the Company's Current Report on
                 Form 8-K filed with the SEC on April 4, 2006)
    10.19        Guarantee Agreement of Four Oaks Fincorp, Inc. dated as of
                 March 30, 2006 (incorporated by reference to Exhibit 10.2 to
                 the Company's Current Report on Form 8-K filed with the SEC on
                 April 4, 2006)
    10.20        Indenture, dated as of March 30, 2006 by and between Four Oaks
                 Fincorp, Inc. and Wilmington Trust Company, as Trustee,
                 relating to Junior Subordinated Debt Securities due June 15,
                 2036 (incorporated by reference to Exhibit 10.3 to the
                 Company's Current Report on Form 8-K filed with the SEC on
                 April 4, 2006)
    10.21        Amended and Restated Severance Agreement with W. Leon Hiatt,
                 III (incorporated by reference to Exhibit 10.1 to the
                 Company's Current Report on Form 8-K filed with the SEC on
                 February 26, 2008) (management contract or compensatory plan,
                 contract or arrangement)
    10.22        Summary of the Material Terms of the 2008 Bonus Plan
                 (incorporated by reference to Exhibit 10.2 to the Company's
                 Quarterly Report on Form 10-Q for the period ended March 31,
                 2008) (management contract or compensatory plan, contract or
                 arrangement)
    10.23        Consulting Agreement with John W. Bullard (incorporated by
                 reference to Exhibit 10.1 to the Company's Quarterly Report on
                 Form 10-Q for the period ended June 30, 2008)
    10.24        Third Amended and Restated Dividend Reinvestment and Stock
                 Purchase Plan (incorporated by reference to Exhibit 10.1 to
                 the Company's Quarterly Report on Form 10-Q for the period
                 ended September 30, 2008) (management contract or compensatory
                 plan, contract or arrangement)
    10.25        Amended and Restated Executive Employment Agreement with Ayden
                 R. Lee, Jr. (incorporated by reference to Exhibit 10.1 to the
                 Company's Current Report on Form 8-K filed with the SEC on
                 December 16, 2008) (management contract or compensatory plan,
                 contract or arrangement)
    10.25        Amended and Restated Executive Employment Agreement with
                 Clifton L. Painter (incorporated by reference to Exhibit 10.2
                 to the Company's Current Report on Form 8-K filed with the SEC
                 on December 16, 2008) (management contract or compensatory
                 plan, contract or arrangement)
    10.26        Amended and Restated Executive Employment Agreement with Nancy
                 S. Wise (incorporated by reference to Exhibit 10.3 to the
                 Company's Current Report on Form 8-K filed with the SEC on
                 December 16, 2008) (management contract or compensatory plan,
                 contract or arrangement)
    10.27        Amended and Restated Executive Employment Agreement with W.
                 Leon Hiatt, III (incorporated by reference to Exhibit 10.4 to
                 the Company's Current Report on Form 8-K filed with the SEC on
                 December 16, 2008) (management contract or compensatory plan,
                 contract or arrangement)
    10.28        Amended and Restated Executive Employment Agreement with Jeff
                 D. Pope (incorporated by reference to Exhibit 10.5 to the
                 Company's Current Report on Form 8-K filed with the SEC on
                 December 16, 2008) (management contract or compensatory plan,
                 contract or arrangement)
    10.29        Supplemental Executive Retirement Plan (incorporated by
                 reference to Exhibit 10.6 to the Company's Current Report on
                 Form 8-K filed with the SEC on December 16, 2008) (management
                 contract or compensatory plan, contract or arrangement)
    10.30        Form of Capital Purchase Program Letter Agreement with Senior
                 Executive Officers (incorporated by reference to Exhibit 10.7
                 to the Company's Current Report on Form 8-K filed with the SEC
                 on December 16, 2008) (management contract or compensatory
                 plan, contract or arrangement)
    21           Subsidiaries of Four Oaks Fincorp, Inc.
    23           Consent of Dixon Hughes PLLC
    31.1         Certification of Chief Executive Officer Pursuant to Rule 13a-
                 14/15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-
                 Oxley Act of 2002
    31.2         Certification of Chief Financial Officer Pursuant to Rule 13a-
                 14/15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-
                 Oxley Act of 2002
    32.1         Certification of Chief Executive Officer Pursuant to 18 U.S.C.
                 Section 1350, as Adopted Pursuant to Section 906 of the
                 Sarbanes-Oxley Act of 2002. [This exhibit is being furnished
                 pursuant to Section 905 of the Sarbanes-Oxley Act of 2002 and
                 shall not, except to the extent required by that Act, be
                 deemed to be incorporated by reference into any document or
                 filed herewith for the purposes of liability under the
                 Securities Exchange Act of 1934, as amended, or the Securities
                 Act of 1933, as amended, as the case may be.]
    32.1         Certification of Chief Financial Officer to Pursuant to 18
                 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
                 Sarbanes-Oxley Act of 2002 [This exhibit is being furnished
                 pursuant to Section 905 of the Sarbanes-Oxley Act of 2002 and
                 shall not, except to the extent required by that Act, be
                 deemed to be incorporated by reference into any document or
                 filed herewith for the purposes of liability under the
                 Securities Exchange Act of 1934, as amended, or the Securities
                 Act of 1933, as amended, as the case may be.]

(b) See (a) (3) above.

(c) See (a) (2) above.

--------------------------------------------------------------------------------

                                       - 86 -

                                                SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) 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.

                             FOUR OAKS FINCORP, INC.

      Date: March 12, 2009   By: /s/ Ayden R. Lee, Jr.
                                 ---------------------
                                 Ayden R. Lee, Jr.
                                 Chairman, President and Chief Executive Officer

              Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.

      Date: March 12, 2009       /s/ Ayden R. Lee, Jr.
                                 ---------------------
                                 Ayden R. Lee, Jr.
                                 Chairman, President and Chief Executive Officer

      Date: March 12, 2009       /s/ Nancy S. Wise
                                 ---------------------
                                 Nancy S. Wise
                                 Executive Vice President and Chief
                                 Financial Officer

      Date: March 12, 2009       /s/ William J. Edwards
                                 ----------------------
                                 William J. Edwards
                                 Director

      Date: March 12, 2009       /s/  Warren L. Grimes
                                 ---------------------
                                 Warren L. Grimes
                                 Director

      Date: March 12, 2009       /s/  Dr. R. Max Raynor, Jr.
                                 ---------------------------
                                 Dr. R. Max Raynor, Jr.
                                 Director

      Date: March 12, 2009       /s/  Percy Y. Lee
                                 ----------------------
                                 Percy Y. Lee
                                 Director

      Date: March 12, 2009       /s/  Paula C. Bowman
                                 --------------------
                                 Paula C. Bowman
                                 Director

      Date: March 12, 2009       /s/ John W. Bullard
                                 -------------------
                                 John W. Bullard
                                 Director


      Date: March 12, 2009       /s/ Michael A. Weeks
                                 --------------------
                                 Michael A. Weeks
                                 Director

<PAGE>

    Exhibit No.  Description of Exhibit
    -----------  ----------------------

    2.1          Merger Agreement, dated as of December 10, 2007, by and among
                 Four Oaks Fincorp, Inc., Four Oaks Bank & Trust Company and
                 LongLeaf Community Bank (incorporated by reference to Exhibit
                 2.1 to the Company's Current Report on Form 8-K filed on
                 December 13, 2007)
    2.2          List of Schedules Omitted from Merger Agreement included as
                 Exhibit 2.1 above (incorporated by reference to Exhibit 2.2 to
                 the Company's Current Report on Form 8-K filed on December 13,
                 2007)
    3.1          Articles of Incorporation of Four Oaks Fincorp, Inc. including
                 Articles of Amendment to Articles of Incorporation.
    3.2          Bylaws of Four Oaks Fincorp, Inc. (incorporated by reference to
                 Exhibit 3.2 to the Company's Current Report on Form 8-K12G3
                 filed with the SEC on July 2, 1997)
    4            Specimen of Certificate for Four Oaks Fincorp, Common Stock
                 (incorporated by reference to Exhibit 4 to the Company's
                 Current Report on Form 8-K12G3 filed with the SEC on July 2,
                 1997)
    10.1         Employment Agreement with Ayden R. Lee, Jr. (incorporated by
                 reference to Exhibit 10.1 to the Company's Quarterly Report on
                 Form 10-Q for the period ended June 30, 1997) (management
                 contract or compensatory plan, contract or arrangement)
    10.2         Severance Compensation Agreement with Ayden R. Lee, Jr.
                 (incorporated by reference to Exhibit 10.2 to the Company's
                 Quarterly Report on Form 10-Q for the period ended June 30,
                 1997) (management contract or compensatory plan, contract or
                 arrangement)
    10.3         Amended and Restated Nonqualified Stock Option Plan
                 (incorporated by reference to Exhibit 10.2 to the Company's
                 Quarterly Report on Form 10-Q for the period ended June 30,
                 2004) (management contract or compensatory plan, contract or
                 arrangement)
    10.4         Amended and Restated Employee Stock Purchase and Bonus Plan
                 (incorporated by reference to Exhibit 10.1 to the Company's
                 Quarterly Report on Form 10-Q for the period ended June 30,
                 2004) (management contract or compensatory plan, contract or
                 arrangement)
    10.5         Second Amended and Restated Dividend Reinvestment and Stock
                 Purchase Plan (incorporated by reference to Exhibit 10.1 to
                 the Company's Current Report on Form 8-K filed with the SEC on
                 December 21, 2006) (management contract or compensatory plan,
                 contract or arrangement)
    10.6         Four Oaks Bank & Trust Company Supplemental Executive
                 Retirement Plan (incorporated by reference to Exhibit 10.6 to
                 the Company's Annual Report on Form 10-KSB for the fiscal year
                 ended December 31, 1998) (management contract or compensatory
                 plan, contract or arrangement)
    10.7         Employment Agreement with Clifton L. Painter (incorporated by
                 reference to Exhibit 10.7 to the Company's Annual Report on
                 Form 10-KSB for the fiscal year ended December 31, 2001)
                 (management contract or compensatory plan, contract or
                 arrangement)
    10.8         Severance Compensation Agreement with Clifton L. Painter
                 (incorporated by reference to Exhibit 10.8 to the Company's
                 Annual Report on Form 10-KSB for the period ended December 31,
                 2002) (management contract or compensatory plan, contract or
                 arrangement)
    10.9         Executive Employment Agreement with W. Leon Hiatt, III
                 (incorporated by reference to Exhibit 10.9 to the Company's
                 Annual Report on Form 10-KSB for the period ended December 31,
                 2003) (management contract or compensatory plan, contract or
                 arrangement)
    10.10        Severance Compensation Agreement with W. Leon Hiatt, III
                 (incorporated by reference to Exhibit 10.10 to the Company's
                 Annual Report on form 10-KSB for the period ended December 31,
                 2003) (management contract or compensatory plan, contract or
                 arrangement)
    10.11        Executive Employment Agreement with Nancy S. Wise (incorporated
                 by reference to Exhibit 10.11 to the Company's Annual Report
                 on Form 10-KSB for the period ended December 31, 2003)
                 (management contract or compensatory plan, contract or
                 arrangement)
<PAGE>

    Exhibit No.  Description of Exhibit
    -----------  ----------------------

    10.12        Severance Compensation Agreement with Nancy S. Wise
                 (incorporated by reference to Exhibit 10.12 to the Company's
                 Annual Report on Form 10-KSB for the period ended December 31,
                 2003) (management contract or compensatory plan, contract or
                 arrangement)
    10.13        Form of Stock Option Agreement (Non-Employee Director)
                 (incorporated by reference to Exhibit 10.1 to the Company's
                 Current Report on Form 8-K filed with the SEC on March 1,
                 2005) (management contract or compensatory plan, contract or
                 arrangement)
    10.14        Form of Stock Option Agreement (Employee) (incorporated by
                 reference to Exhibit 10.2 to the Company's Current Report on
                 Form 8-K filed with the SEC on March 1, 2005) (management
                 contract or compensatory plan, contract or arrangement)
    10.15        Executive Employment Agreement with Jeff D. Pope (incorporated
                 by reference to Exhibit 10.15 to the Company's Annual Report
                 on Form 10-K for the fiscal year ended December 31, 2004)
                 (management contract or compensatory plan, contract or
                 arrangement)
    10.16        Severance Compensation Agreement with Jeff D. Pope
                 (incorporated by reference to Exhibit 10.16 to the Company's
                 Annual Report on Form 10-K for the fiscal year ended December
                 31, 2004) (management contract or compensatory plan, contract
                 or arrangement)
    10.17        Summary of Non-Employee Director Compensation (incorporated by
                 reference to Exhibit 10.1 to the Company's Current Report on
                 Form 8-K filed with the SEC on January 25, 2006) (management
                 contract or compensatory plan, contract or arrangement)
    10.18        Amended and Restated Declaration of Trust of Four Oaks
                 Statutory Trust I, dated as of March 30, 2006 (incorporated by
                 reference to Exhibit 10.1 to the Company's Current Report on
                 Form 8-K filed with the SEC on April 4, 2006)
    10.19        Guarantee Agreement of Four Oaks Fincorp, Inc. dated as of
                 March 30, 2006 (incorporated by reference to Exhibit 10.2 to
                 the Company's Current Report on Form 8-K filed with the SEC on
                 April 4, 2006)
    10.20        Indenture, dated as of March 30, 2006 by and between Four Oaks
                 Fincorp, Inc. and Wilmington Trust Company, as Trustee,
                 relating to Junior Subordinated Debt Securities due June 15,
                 2036 (incorporated by reference to Exhibit 10.3 to the
                 Company's Current Report on Form 8-K filed with the SEC on
                 April 4, 2006)
    10.21        Amended and Restated Severance Agreement with W. Leon Hiatt,
                 III (incorporated by reference to Exhibit 10.1 to the
                 Company's Current Report on Form 8-K filed with the SEC on
                 February 26, 2008) (management contract or compensatory plan,
                 contract or arrangement)
    10.22        Summary of the Material Terms of the 2008 Bonus Plan
                 (incorporated by reference to Exhibit 10.2 to the Company's
                 Quarterly Report on Form 10-Q for the period ended March 31,
                 2008) (management contract or compensatory plan, contract or
                 arrangement)
    10.23        Consulting Agreement with John W. Bullard (incorporated by
                 reference to Exhibit 10.1 to the Company's Quarterly Report on
                 Form 10-Q for the period ended June 30, 2008)
    10.24        Third Amended and Restated Dividend Reinvestment and Stock
                 Purchase Plan (incorporated by reference to Exhibit 10.1 to
                 the Company's Quarterly Report on Form 10-Q for the period
                 ended September 30, 2008) (management contract or compensatory
                 plan, contract or arrangement)
    10.25        Amended and Restated Executive Employment Agreement with Ayden
                 R. Lee, Jr. (incorporated by reference to Exhibit 10.1 to the
                 Company's Current Report on Form 8-K filed with the SEC on
                 December 16, 2008) (management contract or compensatory plan,
                 contract or arrangement)
    10.25        Amended and Restated Executive Employment Agreement with
                 Clifton L. Painter (incorporated by reference to Exhibit 10.2
                 to the Company's Current Report on Form 8-K filed with the SEC
                 on December 16, 2008) (management contract or compensatory
                 plan, contract or arrangement)
<PAGE>
    Exhibit No.  Description of Exhibit
    -----------  ----------------------

    10.26        Amended and Restated Executive Employment Agreement with Nancy
                 S. Wise (incorporated by reference to Exhibit 10.3 to the
                 Company's Current Report on Form 8-K filed with the SEC on
                 December 16, 2008) (management contract or compensatory plan,
                 contract or arrangement)
    10.27        Amended and Restated Executive Employment Agreement with W.
                 Leon Hiatt, III (incorporated by reference to Exhibit 10.4 to
                 the Company's Current Report on Form 8-K filed with the SEC on
                 December 16, 2008) (management contract or compensatory plan,
                 contract or arrangement)
    10.28        Amended and Restated Executive Employment Agreement with Jeff
                 D. Pope (incorporated by reference to Exhibit 10.5 to the
                 Company's Current Report on Form 8-K filed with the SEC on
                 December 16, 2008) (management contract or compensatory plan,
                 contract or arrangement)
    10.29        Supplemental Executive Retirement Plan (incorporated by
                 reference to Exhibit 10.6 to the Company's Current Report on
                 Form 8-K filed with the SEC on December 16, 2008) (management
                 contract or compensatory plan, contract or arrangement)
    10.30        Form of Capital Purchase Program Letter Agreement with Senior
                 Executive Officers (incorporated by reference to Exhibit 10.7
                 to the Company's Current Report on Form 8-K filed with the SEC
                 on December 16, 2008) (management contract or compensatory
                 plan, contract or arrangement)
    21           Subsidiaries of Four Oaks Fincorp, Inc.
    23           Consent of Dixon Hughes PLLC
    31.1         Certification of Chief Executive Officer Pursuant to Rule 13a-
                 14/15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-
                 Oxley Act of 2002
    31.2         Certification of Chief Financial Officer Pursuant to Rule 13a-
                 14/15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-
                 Oxley Act of 2002
    32.1         Certification of Chief Executive Officer Pursuant to 18 U.S.C.
                 Section 1350, as Adopted Pursuant to Section 906 of the
                 Sarbanes-Oxley Act of 2002. [This exhibit is being furnished
                 pursuant to Section 905 of the Sarbanes-Oxley Act of 2002 and
                 shall not, except to the extent required by that Act, be
                 deemed to be incorporated by reference into any document or
                 filed herewith for the purposes of liability under the
                 Securities Exchange Act of 1934, as amended, or the Securities
                 Act of 1933, as amended, as the case may be.]
    32.1         Certification of Chief Financial Officer to Pursuant to 18
                 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
                 Sarbanes-Oxley Act of 2002 [This exhibit is being furnished
                 pursuant to Section 905 of the Sarbanes-Oxley Act of 2002 and
                 shall not, except to the extent required by that Act, be
                 deemed to be incorporated by reference into any document or
                 filed herewith for the purposes of liability under the
                 Securities Exchange Act of 1934, as amended, or the Securities
                 Act of 1933, as amended, as the case may be.]